bank of japan ’ s monthly report of recent economic and financial developments1 bank of japan, communication, 17 / 12 / 98. the bank ’ s view2 the economic deterioration in japan has moderated somewhat, mainly as a result of the increase in public investment. with respect to final demand, business fixed investment has been declining significantly, and housing investment continues to be sluggish. private consumption, as a whole, shows some weakness. meanwhile, net exports ( exports minus imports ) are basically on an upward trend, and public investment has started to increase considerably. reflecting this development of final demand and some progress in inventory adjustments, especially in those of durable goods, the decline in production has been slowing. corporate profits continue to worsen, and employment and household income conditions have deteriorated as the ratio of job offers to applications has recorded a historical low and winter bonuses are expected to decrease. financial conditions are improving in some firms with the effects of the policy measures taken by the government and the bank. nonetheless, firms apparently cannot remove their anxiety about fund - raising conditions. consequently, corporate and household sentiment remains cautious, and a recovery has not been observed in private demand. with the implementation of the government ’ s comprehensive economic stimulus package and recently launched emergency economic measures, the economy is likely to be underpinned mainly by public investment towards [ = during? ] the first half of fiscal 1999. furthermore, the bank ’ s monetary and financial measures and the government ’ s measures to alleviate the credit crunch are expected to take effect gradually. nevertheless, an immediate self - sustained recovery in private demand is hardly expected since corporate profits and household income are deteriorating and the constraints from corporate finance are likely to persist for some time, owing to cautious lending attitudes of private banks. moreover, attention should be paid to the effects of the appreciation of the yen since early autumn and the uncertainty in financial and economic developments abroad. to lead japan ’ s economy into a steady recovery, it is important to prepare an environment where firms and households can regain confidence in japan ’ s economic future by, for instance, promptly restoring the stability of the financial system. with regard to prices, reflecting the expansion in the output gap, wholesale prices are on a downtrend, and corporate service prices are weakening. consumer prices have increased slightly above the previous year ’ s level, owing to the rise in prices of perishables. excluding this effect, however, consumer prices basically continue to be weak. as for the outlook, the economic deterioration is

strictly. given that financial conditions continue to be extremely accommodative, however, attention should be paid to the risk of a further acceleration of firms'investment leading to an excessive build - up of capital stock. whatever the case, the bank will further examine developments in the corporate sector based on data such as the upcoming december tankan. the third important factor is the extent to which the positive influence of the strength in the corporate sector continues to feed through into the household sector. the number of employees has been rising at an annual rate of 1. 0 - 2. 0 percent driven by the strength in corporate activity. looking at developments in wages per worker, while regular payments have been flat year on year, special payments and overtime payments continue to rise, and as a result wages per worker have been rising moderately. in this situation, private consumption, especially outlays for services and durable consumer goods, continues to trend upward. the preliminary estimates of real gdp for the julyseptember quarter indicated a decrease in private consumption by 0. 7 percent on a quarter - on - quarter basis, but this seems to have been attributable to the substantial decline in consumer spending reported in the family income and expenditure survey, which provides the basic statistics for consumer spending. it should be noted that figures in the family income and expenditure survey were considerably weaker than sales statistics and other statistics related to consumption. still, even allowing for this, private consumption was somewhat weak in the july - september quarter, and therefore the bank will watch closely developments in private consumption from the autumn onward so as to check whether this weakness was due to temporary factors, such as unfavorable weather and the tax rise in tobacco products. lastly, in relation to this point, developments in wages and prices are important factors that need to be watched closely. the bank expects the year - on - year rate of increase in the consumer price index ( cpi ; excluding fresh food, on a nationwide basis ) to rise gradually with the output gap remaining positive and expanding at a moderate pace while downward pressure from declining unit labor costs ( labor costs per unit of output ) weakens. if, in contrast with past experience, productivity keeps rising with wage increases lagging behind in spite of the prolonged economic expansion, there may be no upward shift in the inflation rate. despite the steady tightening of labor market conditions, the rate of increase in wages has remained moderate so far because, while employers faced with intensified global competition are maintaining their restraint on