bank of japan ’ s july report of recent economic and financial developments1 bank of japan, 16 july 2001 * the bank ’ s view * * adjustments in economic activities are intensifying, as production is declining substantially reflecting a fall in exports. with regard to final demand, private consumption remains flat on the whole. housing investment is declining and public investment is also about to decrease since the implementation of the supplementary budget for fiscal 2000 has peaked out. net exports ( real exports minus real imports ) continue to decrease, reflecting not only a slowdown in overseas economies but also sluggish demand for it - related goods. business fixed investment has started to decrease while exporting conditions continue to deteriorate. industrial production continues to decline sharply, reflecting such developments in final demand and a further buildup of excess inventories of electronic parts and some materials. corporate profits and business sentiment are also worsening particularly in manufacturing. income conditions of households have not yet deteriorated, but the decline in production is starting to affect the household sector mainly through the decrease in hours worked. as for 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. judged from leading indicators and investment plans of firms, business fixed investment is projected to follow a downward trend. in addition, 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. in these circumstances, a decline in corporate profits seems inevitable for the time being and thus household income is expected to weaken gradually. overall, the adjustments, mainly in production, are likely to continue for some time. among factors affecting exports, it is generally thought that inventory adjustments in it - related goods will have come to an end by early fall and overseas economies, particularly the united states, will follow a gradual recovery trend from around the end of this year. in this case, exports are expected to underpin the economy once again. however, a prolonged deceleration of overseas economies could yield the risk of economic adjustments spreading further. also, attention should be paid to the risk of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. with regard to prices, import prices are mostly unchanged. domestic wholesale prices are weak mainly due to the decrease in prices of electrical machinery. consumer prices continue to be somewhat weak

risks. on the other hand, credit demand of private firms continues to lack momentum as the level of corporate expenditures such as business fixed investment remains below firms ’ cash flow. moreover, firms continue to reduce their debts as part of their balance - sheet restructuring measures. as a result, credit demand in the private sector has continued to be basically stagnant. in view of this, the underlying tone of private banks ’ lending remains sluggish. meanwhile, the growth rate of amount outstanding of corporate bonds issued is recently rising slightly. the amount outstanding of cp issued is well above that of the previous year and marking the highest level to date, reflecting the favorable environment for issuing cp. the growth rate of money stock ( m2 + cds ) in june was higher than that of the previous month due mainly to the inflow from postal savings. funding costs for firms are on a declining trend reflecting developments in market interest rates. in this financial environment, the lending attitudes of financial institutions and corporate financing conditions remain easy as a whole. for the time being, attention should be paid to the effects of the monetary easing measures taken by the bank, while careful monitoring is required for the effects of stock price developments and corporate profit conditions on the behavior of financial institutions and the fund - raising conditions of firms.