bank of japan ’ s march report of recent economic and financial developments1 bank of japan, 21 march 2001. * * * the bank ’ s view2 the recovery in japan ’ s economy has recently come to a pause, reflecting a decrease in exports. with regard to domestic demand, business fixed investment is increasing. the recovery in private consumption continues to be weak as a whole, but there are somewhat positive signs in some indicators. housing investment is virtually unchanged. public investment is bottoming out. while domestic demand remains steady, net exports ( real exports minus real imports ) are plummeting reflecting a sharp slowdown in overseas economies such as in the u. s. and east asia. mainly due to these developments, industrial production is starting to decline, and inventories of some materials and electronics parts are becoming excessive. corporate profits continue to improve but the pace is thought to be slowing significantly, particularly in the manufacturing industries, as exports and production are recently weakening. income conditions of households have not deteriorated but the effects of the decline in production are starting to be observed in new job offers and overtime working hours. as for the outlook, public investment is expected to start increasing with the advance in the implementation of the supplementary budget for fiscal 2000. net exports, however, are likely to continue decreasing for a while, as adjustments in overseas economies will take some time. leading indicators suggest that business fixed investment is likely to peak out gradually, although there will be a backlog of orders to be implemented for a while. in addition, the need for inventory adjustments, although not to a large extent, is heightening for some goods. thus, industrial production is expected to follow a declining trend. in these circumstances, the increase in corporate profits is likely to be subdued, and recoveries in household income and consumption are projected to be sluggish. overall, the economy will likely remain stagnant for some time. 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, together with the effects from the depreciation of the yen, exports are expected to underpin the economy once again. however, attention should still be paid to the possibility of a prolonging deceleration of overseas economies and risks of a negative impact on the economy induced by developments in foreign and domestic capital markets through corporate and household confidence. with regard to prices, import prices are rising, mainly reflecting the depre

for february 2016, mainly as a result of an acceleration in food price inflation. following sharp increases in agricultural food prices in earlier months as a result of the severe drought conditions, food price inflation increased markedly by 1, 8 percentage points to 8, 8 percent in february 2016 – the highest level since august 2014. food price inflation at the producer level registered 9, 0 percent in february, significantly up from the 7, 8 percent recorded in january. agricultural food prices on the other hand has also followed a similar trend, increasing by 27, 2 percent in february as compared to 25, 9 percent in january 2016. these increases are expected to impact consumer prices with a lag. in addition, current indications are not encouraging for the expected agricultural output for the coming season. according to the most recent estimates ( february 2016 ), the agricultural land or area under cultivation will be approximately 26 percent smaller than last year. further, maize which has an important direct and indirect impact on overall food inflation will have to be imported in the coming year in order to meet the annual domestic and commercial consumption of roughly 9, 6 million tons. the sarb forecasts as at the march mpc meeting – which did not consider the february inflation numbers – showed that annual cpi food price inflation was expected to peak at 11, 6 percent in the final quarter of 2016 as compared to the forecast of 11, 3 percent at the beginning of 2016. food price pressures, which have intensified in recent months pose a significant upside risk to inflation. bis central bankers ’ speeches inflation is now expected to average 6, 6 percent and 6, 4 percent in 2016 and 2017, compared to the 6, 8 percent and 7, 0 percent forecasted at the beginning of the year. it is expected to peak at 7, 3 percent in the fourth quarter of 2016 and only return to within the target range during the fourth quarter of 2017. this represents a protracted breach implying that underlying pressures remain elevated. let me now turn to a discussion of some of the underlying inflationary pressures in the economy. the sarb ’ s forecast shows that core inflation will breach the upper end of the target range in the second quarter of 2016 for four consecutive quarters, with a peak at 6, 5 percent in the latter half of 2016. core inflation is expected to average 6, 2 percent in 2016, and 5, 7 percent and 5, 2 percent in the next two years, respectively. average inflation expectations have remained undesirably close to the upper target