bank of japan ’ s october report of recent economic and financial developments1 bank of japan, 15 october 2001 * the bank ’ s view * * adjustments in economic activity are becoming more severe, as the substantial decline in production has a negative influence on employment and income conditions. in addition, the terrorist attacks in the u. s. have further heightened uncertainty in japan ’ s economy. 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 is also decreasing noticeably while exporting conditions continue to deteriorate. housing investment remains sluggish and public investment is declining. meanwhile, private consumption remains almost flat on the whole, although somewhat weak indicators are increasing recently. industrial production continues to decline considerably, reflecting these developments in final demand and also strong excessiveness in inventories of electronic parts and materials. the decrease in corporate profits, particularly in manufacturing, has become evident and household income weakens gradually. moreover, while such perception is becoming widespread that a further deceleration in overseas economies is inevitable due to the terrorist attacks in the u. s., precautions against the business outlook are intensifying among japanese exporting firms. turning to the outlook, as for exporting conditions, although inventory adjustments in it - related goods worldwide are expected to continue for the time being, the prevailing view is that the adjustments will be basically completed by around next spring. however, there exists a risk that the prolonged downturn in u. s. private consumption affected by the terrorist attacks would induce another round of adjustments in the japanese economy, starting from the decline in exports such as of consumer goods. under these circumstances for exports, uncertainty toward the economy is growing further. meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downward trend judged not only from the continuous decline in corporate profits, but also from the successive downward revisions of firms ’ investment plans in the it - related sector. private consumption is likely to weaken gradually along with the deteriorating employment and income conditions. thus, the income - generating mechanism from corporate profits to employment and wages is starting to work adversely, and at the same time government spending is projected to follow a downward trend. 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

often the case that the shortage of relevant human resources has constrained the expansion of businesses. with the ongoing efforts toward digitalization, the shortage of human resources for information technology is a pressing issue. in order to respond boldly to the major changes, firms have made efforts not only to improve workers'skills through in - house training but also to acquire new skills through the exchange of human resources with other industries. it is important for firms to further step up efforts that they already have made to improve their workers'skills in order to adapt to structural changes. capital input : capital stock accumulation through business fixed investment the next issue is capital input. one of the reasons for prolonged low growth after a major crisis is that the accumulation of the necessary capital stock is hampered. that is, in the aftermath of a crisis in which corporate profits deteriorate, economic uncertainties increase, and the funding environment worsens, business fixed investment will be constrained excessively, and firms'continuing cautious stance will lead to prolonged stagnation in capital accumulation. let us look at the past business fixed investment stance of firms in japan ( chart 11 ). following the bursting of the bubble economy, they remained reluctant to make fixed investment for a long period under prolonged deflation. however, as i mentioned at this meeting last year, firms surely had become more active with their fixed investment in recent years, mainly on the back of high levels of profits. during this situation, early this year, we were hit by the shock of covid - 19. it is true that the high levels of savings that remained on hand even after making active investment have mitigated the impact of the shock. however, the important thing is that being excessively cautious with investment based on this experience will negatively affect future competitiveness. i think that firms are well aware of this point. many are saying that, despite the shock, they will continue to make necessary investment, given that they significantly constrained fixed investment after the gfc and subsequently lost their competitiveness. when looking ahead to the post - covid - 19 era as well, i think it is important not to interrupt the positive trend seen before the outbreak, which was to invest aggressively for the future. technological progress : continued investment for growth technological progress is also important ( chart 12 ). there are many examples like the gfc where, in the aftermath of a crisis, technological progress stagnated and productivity growth in the economy as a whole remained weak accordingly. one of the reasons is the