bank of japan ’ s september report of recent economic and financial developments1 bank of japan, 20 september 2001 * the bank ’ s view * * adjustments in economic activity are becoming more severe, as the substantial decline in production, starting from a fall in exports, is beginning to have a negative influence on employment and income conditions. 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 flat on the whole, although there are some weak indicators. industrial production continues to decline considerably, reflecting these developments in final demand and strong excessiveness in inventories of electronic parts and materials. corporate profits and business sentiment are also worsening, particularly in manufacturing. affected by such developments, household income is weakening gradually. turning to the outlook, public investment is expected to follow a declining trend. net exports are likely to continue decreasing for a while amid the deceleration in overseas economies and ongoing inventory adjustments in it - related goods worldwide. based on the developments in leading indicators and judged from the successive downward revisions of firms ’ investment plans in the information and communications sector, business fixed investment is also expected to follow a downward trend. private consumption is likely to become weak gradually while employment and income conditions continue to deteriorate. in addition to such developments in final demand, inventory adjustments in goods such as electronic parts and materials will continue for the time being. industrial production is, therefore, expected to follow a declining trend. as for it - related goods, although the sluggish final demand of these goods worldwide has been preventing the progress in inventory adjustments, the view that the adjustments are likely to finish by around next spring is prevailing. therefore, the decline production in this sector is expected to cease some time in the future. however, uncertainty regarding the outlook for the recovery of overseas economies, particularly for the u. s., is growing further while the global economy continues to decelerate concurrently. at home, while the income - generating mechanism from corporate profits to employment and wages is starting to work adversely, government spending is projected to follow a downward trend. under these circumstances, it may take some time for overall production activity to stop declining. overall, adjustments in economic activity, starting from the decline in

to form a long - term life plan and thus raise children. this aggravates the problem of fewer children and the decreasing population size. finally, asset decumulation by baby boomers may exert an impact on the asset market. the public pension fund has accumulated about 130 trillion yen, which will be paid out as pension benefits for the baby boomers. furthermore, the privatization of the postal saving and insurance system may complicate the debt management policy. it seems likely that a decline in the functioning of the asset market due to the decumulation of assets can be avoided by the gradual shifts in asset demand as well as the globalization of the financial market. nevertheless, it seems important to develop the market for asset decumulation : that is, to transform the real capital stock held by the elderly into income streams. in japan, the market for reverse mortgages has yet to be developed. the risk related to longevity and land price declines, in addition to underdevelopment of the secondary market for housing, impedes the development of the reverse mortgage market. it seems necessary not only to implement adequate assessment of the market value of housing stock, but also to improve the quality of housing stock, in order to increase the marketability. the securitization of housing loans seems to be the key to transform the financial system into a market - based one and to develop the market of released equities. in this regard, it is encouraging to see the recent expansion of real estate investment trusts, private real estate funds, asset - backed commercial paper, asset - backed securities, mortgage - backed securities and collateralized debt obligations. the bank has contributed to the development of the securitization market by introducing the purchase of asset - backed commercial paper and asset - backed securities after july 2003 and initiating a survey related to securitized instruments. see bodie, merton and samuelson ( 1992 ). 4. conclusion to conclude, the ageing process in japan is accompanied by systemic social changes including the employment system, the social security system and the financial system. for the central bank that is striving to overcome deflation, the ageing issue of society presents a challenging task, because it requires the establishment of a more efficient financial system to secure a higher rate of return on savings, while maintaining price stability and avoiding the risks of inflation as well as deflation.