bank of japan's december review of monetary and economic trends in japan bank of japan, monthly economic review, 20 / 12 / 96. a moderate economic recovery continues in japan, as private demand shows increasing firmness. with respect to final demand, public sector investment has peaked, but housing investment has remained at a high level because of low interest rates. the decline in net exports has paused. business fixed investment is increasing steadily and a moderate increase also continues in personal consumption. meanwhile, inventories on the whole are at appropriate levels. in these circumstances, industrial production growth is somewhat accelerating and corporate sentiment is improving gradually. labor market conditions have improved on the whole, although the unemployment rate has remained at a high level. meanwhile, the decline in prices is slowing gradually and monetary aggregates continue to grow at 3. 0 - 4. 0 per cent. with regard to personal consumption, growth in sales of electrical appliances has been high, particularly in personal computers and cellular phones, and passenger car sales ( excluding compact cars ) have recently increased significantly. outlays for travel have remained firm and sales at department stores and supermarkets are increasing at a moderate pace. among leading indicators of business fixed investment, machinery orders are increasing steadily albeit with some quarterly fluctuations. after the decline in the third quarter 1996, they are expected to increase significantly in the fourth quarter. construction floor area has also picked up moderately. according to the bank of japan ’ s tankan - - short - term economic survey of enterprises in japan of november 1996, business fixed investment plans of principal manufacturing firms for fiscal 1996 continued to increase at the same pace as those for fiscal 1995, while those of non - manufacturing firms turned to increase for the first time in five years. as a result, business fixed investment of principal firms overall is expected to expand at a faster pace than in fiscal 1995. business fixed investment plans of small firms ( all industries ) were revised upwards substantially from the august tankan, marginally exceeding the level of the previous year for the first time in five years. this shows that the recovery in business fixed investment is spreading across a wider spectrum of industries and corporate sizes. with respect to housing investment, housing starts have continued to grow reflecting low interest rates and reasonable housing prices. it recorded a seasonally - adjusted annual rate of 1. 82 million starts in october 1996, the highest level since november 1973, partly reflecting the increase in orders in september 1996 before the expected rise in the consumption tax. regarding public - sector investment,

but potent interconnections between firms in the global financial system. policy response for most of the last year, the bank has adopted a twin track approach, as part of the tripartite partnership with the fsa and the treasury. the first track has been to provide liquidity to the market in order to give most banks time to make the necessary adjustments – including by raising capital. that has involved an increasing range of measures including long term repos on a wide range of collateral and the introduction of the special liquidity scheme which allows banks to swap illiquid assets for treasury bills for periods of up to three years. the recent dollar swaps and further extensions of the sls and eligible collateral are further steps in that direction. and we recently announced a more permanent structure of money market operations including the introduction of a discount window. the second track has been to work closely with the fsa and treasury to limit the repercussions from the failure of banks which do not have an independent future whether through arranging mergers or managing closure. northern rock was the first in line and led to a lot of criticism of the tripartite. i think we have learned a great deal over the year and have shown more skill and speed with subsequent cases including bradford and bingley recently. but in the last 6 weeks it became clear that this case by case approach was not enough either at home or internationally. despite the provision of additional liquidity to the system, market conditions got worse over the summer as worries grew about the downturn in the broader economy and its consequences for bank losses. once again the triggers for a further downward lurch came in the us. first fannie mae and freddie mac were taken into conservatorship and then, the following weekend, lehman brothers proved unable to find a buyer and filed for bankruptcy. that shook markets which had expected it to be saved by the state, if necessary, as had been the case with bear stearns earlier in the year. within a day, aig had to be rescued following rumours about the size of its losses on cds contracts and pressures grew on the remaining securities dealers. later in the week, secretary paulson announced his initial $ 700 billion plan to purchase assets to support the banking sector. it didn ’ t entirely still the doubts. the pressures were also felt in europe. at the end of september dexia, fortis and hypo real estate all had to receive emergency capital injections, mostly government supplied. in the