bank of japan ’ s november report of recent economic and financial developments1 bank of japan, 19 november 2001 * the bank ’ s view * * adjustments in economic activity are becoming more severe, as the substantial decline in production is beginning to have an adverse effect on private consumption through decreases in employment and income. with regard to final demand, net exports ( real exports minus real imports ) continue to decline, reflecting not only a slowdown in overseas economies but also sluggish demand for it - related goods. business fixed investment also continues to decrease while the deterioration in exporting conditions persists. housing investment remains sluggish and public investment is on a downward trend. moreover, private consumption seems to be weakening gradually. industrial production continues to decline considerably, reflecting these developments in final demand and also strong excessiveness in inventories of electronic parts and materials. corporate profits are deteriorating, particularly in manufacturing, and the weakness in household income is becoming evident amid the decrease in the hours worked and the rise in unemployment. turning to the outlook, as for exporting conditions, the prevailing view is that inventory adjustments in it - related goods worldwide are expected to be mostly completed by around next spring. however, while the world economy has decelerated further since the terrorist attacks in the u. s., final demand of it - related goods is likely to be stagnant for the time being. moreover, if the downturn in u. s. private consumption persists, it may induce another round of adjustments in the japanese economy, starting from the decline in exports such as of consumer goods. meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downward trend, particularly in the it - related sector, amid the decline in corporate profits. private consumption will also continue to be weak along with deteriorating employment and income conditions and the more cautious consumer sentiment. government spending is projected to follow a downtrend at the time when the substantial decline in exports and production is negatively affecting private consumption through the decrease in household income. consequently, it may take quite a while for overall production activity to stop declining, although the decrease in the production of it - related goods may eventually come to an end. overall, adjustments in economic activity, starting from the decline in exports since the beginning of this year, will surely dampen domestic demand further. at the same time, concern that another substantial decline in exports will exert downward pressure on the economy is growing. moreover, while the economy continues to be in

we were in agreement that the swedish business cycle is fairly close to the point at which it is reasonable to give monetary policy a less expansionary stance. although we all endorsed the outlook for inflation and the economy in the inflation report a number of us were of the opinion that it provided scope for somewhat different interpretations of exactly when the interest rate needs to be raised. i myself and two other members for a more detailed overview of the debate ; see bean, c. ( 2003 ), " asset prices, financial imbalances and monetary policy : are inflation targets enough? ", speech at a bis conference on " monetary stability, financial stability and the business cycle ", 28 - 29 march 2003, basel, switzerland. ( http : / / www. bankofengland. co. uk / publications / speeches / 2003 / speech200. pdf ) interpreted the analysis in such a way that we deemed an increase of 0. 25 percentage points to be warranted already at the time of the monetary policy meeting. allow me to say something about the reasons that, in my opinion, suggest that it would have been appropriate to take a first step towards less expansionary monetary policy at the beginning of december. one is that there hardly can be any doubt now that we are in the midst of a strong, stable cyclical upswing. the economic climate has improved in the us and asia and the swedish labour market is showing clear signs of a recovery – not least statistics from staffing companies are pointing to a pick - up in demand for labour. another reason is that an interest rate rise would reduce the risk of the krona weakening further as monetary policy in other countries gradually becomes less and less expansionary. the interest rate differential in relation to the euro area and the us seems recently to have had great significance for developments in the krona exchange rate. a third reason – perhaps the most important – has to do with what i have spoken about here today. my assessment is that house prices and household debt may very well have reached levels at which there is a risk of there arising a self - reinforcing negative spiral with falling house prices and weak demand growth when the business cycle eventually turns down. even if it were not – as i already pointed out – a case of a correction of an overvalued market, such an adjustment could be comparatively abrupt. in my opinion, an earlier initiated and more gradual raising of interest rates would increase the chances of a more orderly slowdown in the rate of price