bank of japan ’ s june report of recent economic and financial developments in japan bank of japan, communication, 16 / 6 / 98. the bank ’ s view1 final demand remains weak and production continues to decline in japan. as a consequence, employment and income conditions have recently shown a significant deterioration. with respect to final demand, public - sector investment seems to have bottomed out. growth in net exports, however, has virtually peaked out as exports to other asian countries declined. business fixed investment continues to be on the decline. private consumption shows little sign of recovery, although the deterioration has slowed. housing investment has decreased further. against the background of weak final demand, inventories have accumulated further and industrial production continues to decrease. as a result, corporate profits have worsened, and employment and income conditions have deteriorated evidently, as seen recently in the rapid rise of the unemployment rate. as for the outlook of the economy, the implementation of the supplementary budget for fiscal 1998 is assumed to boost demand through additional public works and special income tax - reduction, and cease the negative interactions of production, income, and expenditure. however, such positive effects of the fiscal policy may be weakened, if the ongoing rapid deterioration in employment and income conditions further dampens the overall economic activities. therefore, the overall economic activities, including corporate and household confidence, should be carefully monitored. with regard to prices, wholesale prices continue to fall and consumer prices ( excluding the effects of institutional changes ) have declined slightly below the previous year ’ s level. with respect to the factors affecting the outlook, the downward pressure on domestic prices induced by the decline in import prices including overseas commodity prices has already weakened. also, the expansion in the output gap in the economy is expected to slow in line with the implementation of the economic stimulus package. however, reflecting the present high inventory level and the relatively large output gap, prices are likely to be weak for some time. there may also be additional downward pressures if domestic demand weakens further. as for financial markets, rates on term instruments ( for both spots and futures ) have been generally steady in the money markets. yields on long - term government bonds recorded historical lows from late april to early june with the releases of weak economic indicators, and are recently showing a slight turnaround. stock prices have been slightly declining, indicating the weak market sentiment on the economy. market concern towards credit risk remains strong, and the yield differential between bonds issued by the private sector and those by the government has been significant

” in terms of yield curve control, with a view to facilitating the formation of the yield curve that is considered most appropriate for achieving the price stability target, the bank has conducted purchases of japanese government bonds ( jgbs ) under the guideline for market operations, in which it sets the short - term policy interest rate at minus 0. 1 percent and the target level of 10 - year jgb yields at around zero percent. although it is likely that japan ’ s economy will continue on an expanding trend and the year - onyear rate of change in the cpi will increase gradually toward 2 percent, the bank considers it necessary to continue to pay close attention to downside risks, particularly regarding 1 / 2 bis central bankers'speeches developments in overseas economies. based on this recognition, the bank deems it appropriate to take the policy stance of being tilted toward monetary accommodation. at the monetary policy meeting held in october, the bank decided on a new forward guidance for the policy rates and clarified its stance to maintain the present levels of the policy rates or, depending on the situation, lower them from the present levels, as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost. under this policy stance, the bank will continue to pursue powerful monetary easing toward achieving the price stability target. in doing so, the bank considers it important to take into account both the effects and side effects of monetary policy, including those on financial markets and the functioning of financial intermediation. on this point, the bank recognizes that prolonged downward pressure on financial institutions ’ profits, with the low interest rate environment and severe competition among financial institutions continuing, could create risks of a gradual pullback in financial intermediation and of destabilizing the financial system. although these risks are judged as not significant at this point, mainly because financial institutions have sufficient capital bases, the bank will continue to examine these risks as well as those considered most relevant to the conduct of monetary policy and conduct its policy in an appropriate manner, taking account of developments in economic activity and prices as well as financial conditions. thank you. 2 / 2 bis central bankers'speeches