bank of japan ’ s august report of recent economic and financial developments1 bank of japan, communication, 17 august 1999. * * * the bank ’ s view2 japan ’ s economy, at present, has stopped deteriorating, and corporate sentiment has seen a slight improvement recently. however, clear signs of a self - sustained recovery in private demand have not been observed yet. with regard to final demand, business fixed investment has been on a downward trend. recovery in private consumption continues to be weak on the whole. net exports ( exports minus imports ) are sluggish at present due to an increase in imports. meanwhile, housing investment has continued to recover, and public works have been rising. reflecting such developments in final demand and continued progress in inventory adjustment, industrial production has stopped decreasing. in addition, corporate and consumer sentiment has seen an improvement due to the effects of measures taken to restore the stability of japan ’ s financial system and the continued monetary easing by the bank. the improvement in corporate sentiment, however, has not necessarily stimulated business activities, because firms strongly feel that they have excess capacity and employees and their profits remain weak. meanwhile, the improvement in consumer sentiment is underpinning household expenditure even under the worsening employment and income conditions, but is not strong enough to push up overall private consumption. as for the outlook, with the progress in inventory adjustment gradually paving the way for a recovery in production, improvements in the overall financial environment partly due to the monetary easing by the bank, along with a series of economic measures taken by the government, are expected to continue underpinning the economy. moreover, the recovery of overseas economies, especially of asian economies, is likely to have a positive impact on domestic production. nevertheless, under cautious sales plans, firms are implementing further restructuring to improve their profitability. although such corporate restructuring is expected to improve productivity, it is likely, in the short run, to reduce fixed investment and discourage household expenditure through the resulting deterioration in employment and income conditions. under such circumstances, it is still difficult to expect an immediate selfsustained recovery in private demand. overall economic developments require careful monitoring in consideration of the above points. it is also important to promote structural reform in order to assure the economy ’ s sustained growth in the medium term. with regard to prices, import prices continue to rise due to the increase in international commodity prices such as crude oil prices. domestic wholesale prices are leveling off due to the progress in inventory adjustment as well as an increase in prices

necessary promotions to their staff. in the meantime, their boards of directors and shareholders of these banks should strengthen the monitoring and should be ready for a larger financial support for the bank ’ s activity. in particular, i would like banks to be cautious with regard to : • the continuous monitoring and controlled conduct of lending activity, focusing on setting realistic development objectives, on the exposure to related persons, exposure to foreign currency – in particular, to borrowers with insufficient financial assets in foreign currency, exposure to new loan products, such as consumer loan, etc. it is crucial for banks to rigorously observe the lending and loans ’ quality analysis procedures. moreover, they should maintain a conservatory stand, in terms of being insured with pledges and collaterals, and of providing for reserve funds, required in cases of non - performing credit risk. in this context, the bank of albania expects commercial banks to duly observe the final amendments made to the regulation “ on managing credit risk ”. • the consolidation of internal control systems of their activity, in view of the adoption of best accounting standards in management, as well as the careful formulation and analysis of financial statements by the banks ’ structures and their internal and external auditing. with regard to the latter, we are under the process of enhancing the reporting system, by shortening the reporting time of the financial data, periodically reported by banks to the bank of albania. we think that banks should qualitatively improve the method of preparing and reporting these data to the bank of albania. these issues will be the topic of discussion in a special meeting to be held in the near future. from the legal viewpoint, the issues related to the conduct of a safe banking business have been addressed at a higher level, in the new law “ on banks in the republic of albania ”, passed by the albanian parliament on 18 december 2006, and becomes effective on 1 june 2007. some of its important amendments are the following : a more complete addressing of banking business supervision issues, including the organization, the risk monitoring, the provision of prudential supervision norms, the clarification of procedures related to the management and liquidation, the inclusion of some general principles related to the client ’ s protection ( consumer of banking products ) etc. following the notification sent by the bank of albania on january this year, the banks should speed up the steps to duly and timely carry out the necessary changes in their internal procedures, which ensure the complete consistency of their business with the requirements of the new law