persistently strong negative interactions of production, income, and expenditure, the expansion in the output gap seems unlikely to cease despite the expected effects of the comprehensive economic stimulus package. furthermore, the continued decline in wages and the recent appreciation of the yen may exert downward pressure on prices. hence, prices are likely to be on a downtrend for some time. in the financial markets, responding to the further monetary easing by the bank of japan on september 9, short - term interest rates declined as a whole after mid - september. however, since the end of september, the japan premium has expanded and interest rates on euro - yen deposits this report was written based on data and information available when the bank of japan monetary policy meeting was held on october 13, 1998. the bank ’ s view on recent economic and financial developments, determined by the policy board at the monetary policy meeting held on october 13, as the basis of monetary policy decisions. have rebounded slightly reflecting intensified market concern toward japanese financial institutions ’ funding in foreign currencies over the year - end. in the meantime, due to heightened uncertainty over the economic outlook, long - term interest rates declined considerably. stock prices continued a downtrend reflecting the concern over the worldwide stock market plunge, the further deterioration in economic indicators, and the persistent uncertainty over the resolution of the problems with japan ’ s financial system. in october, stock prices recorded historically low levels since the bursting of the economic “ bubble ”. meanwhile, in early october, the yen surged against the dollar with the emerged uncertainty over the outlook of the us economy. with regard to corporate finance, while funding needs for real economic activities seem to be decreasing, some firms, especially large ones, are seeking to secure ample on - hand liquidity to prepare for unexpected situations. reflecting such increase in credit demand, the growth rate in m2 + cd has slightly recovered since the summer of 1998. however, japanese financial institutions have become more cautious in extending loans, facing up severe fund - raising environments and deteriorating business conditions of borrower companies. while especially large firms are steadily increasing the issuance of commercial paper and corporate bonds, small and medium - sized firms and relatively low - rated ones continue to face difficult conditions for fund - raising in capital markets. the influence of these severe financial conditions on business activities and on the economy continues to warrant careful monitoring.

, because they see, for instance, their insurance policies and retirement schemes at risk of not being fully honored. at the same time, low growth implies low return from real investment, and this creates perverse incentives to search for yield taking risk on board ; this may jeopardize financial stability. one main lesson comes from these considerations. the most effective and long - lasting solution to tackle the declining trend of real interest rates is to act forcefully and preemptively to support growth. support remains necessary from the demand side ; but in the longer run it must come from the supply side, by identifying and implementing those reforms that, encouraging investment, may boost productivity and support job creation. we need to prove robert gordon ’ s prophecy wrong. the consequent increase in potential economic growth would raise the real interest rate and push nominal interest rates into a safer territory. reinhart, c. m. and rogoff, k. s. ( 2009 ), “ this time is different : eight centuries of financial folly. ” princeton, new jersey : princeton university press. bis central bankers ’ speeches