In global financial markets, widespread adjustments stemming from the U.S. subprime mortgage problem continued. Against the background of strong anxiety about financial institutions'' availability of funds maturing beyond the year-end, financial markets had continued to be unstable, partly due to growing market concerns about possible further losses that financial institutions might incur. Repricing of securitized products had continued, and credit spreads had widened.


In money markets, interest rates on term instruments had risen further. To deal with the situation, five central banks announced measures designed to address elevated pressures in short-term funding markets. Two other central banks, including the Bank of Japan, issued statements welcoming these measures.

U.S. stock prices fell temporarily, then turned upward mainly due to heightened expectations for a reduction in the policy interest rate by the Federal Reserve and reports of strengthening of some financial institutions'' capital. Long-term interest rates in the United States had also increased after declining temporarily. In Europe, developments in stock prices and long-term interest rates had followed those in the United States. Developments in stock prices and long-term interest rates in emerging economies had basically reflected those in the United States and Europe.

Economic and Financial Developments in Japan

Economic developments

Exports had been increasing against the background of the expansion of overseas economies. They rose substantially in the July-September quarter from the previous quarter, and continued to increase in October, albeit marginally. Exports were expected to continue to rise against the background of the expansion of overseas economies as a whole.

As for domestic private demand, business fixed investment had continued to trend upward and was expected to continue to do so since the growth in domestic and external demand and the high level of corporate profits were likely to be maintained.

Private consumption had been firm. With regard to durable consumer goods, the number of new passenger-car registrations, which previously were declining, had picked up since August, supported mainly by strong sales of new models. Sales of electrical appliances had continued to increase reflecting the continuing strong sales of digital appliances such as flat-panel televisions and of game consoles. Sales at department stores and supermarkets, which primarily sold nondurable and semi-durable consumer goods, had been more or less unchanged, with fluctuations caused by the weather. As for services consumption, sales in the food service industry had continued to trend upward, albeit with large fluctuations caused by the weather, and outlays for travel had generally been firm. Indicators of consumer sentiment had recently deteriorated slightly due to price rises in daily necessities, such as petroleum products and food products, and a series of announcements of price rises in these goods amid sluggishness in wages. Private consumption was expected to follow a gradual uptrend, reflecting the gradual increase in household income.

As for housing investment, housing starts had recently dropped sharply, affected by the revised Building Standard Law coming into force. Housing investment was likely to be sluggish for the time being, but was expected to regain its firmness in due course against the background of the rise in household income and the accommodative financial environment.

Production had continued to increase and was expected to continue to follow an increasing trend, reflecting the rise in domestic and external demand. Inventories had been more or less in balance with shipments.


As for employment and income, in a situation where firms were increasingly

feeling a shortage of labor, household income had continued rising moderately, supported by the increase in the number of employees. Nominal wages per worker, however, had remained somewhat weak. The gradual increase in household income was likely to continue against the background that firms continued to feel a shortage of labor and corporate profits were expected to remain high.

On the price front, international commodity prices showed the following developments: crude oil prices had been high, mainly due to the tightening of supply and demand conditions, while prices of nonferrous metals had also been high on the whole, albeit with some fluctuations. The three-month rate of change in the domestic corporate goods price index (CGPI) had been positive, mainly due to the rise in international commodity prices, and the CGPI was likely to continue increasing for the time being. The year-on-year rate of change in the CPI (excluding fresh food) had been around 0 percent. It was projected to follow a positive trend due to the rise in prices of petroleum products and food products in the short run and the positive output gap in the longer run.

Financial environment

The environment for corporate finance was accommodative. Credit demand in the private sector had been more or less flat, since ample cash flow had slowed the increase in corporate demand for external funds. The issuing environment for CP and corporate bonds had been favorable as a whole, although issuance spreads on those issued by firms with low credit ratings had expanded slightly. The lending attitudes of private banks had continued to be accommodative, and the amount outstanding of lending by private banks had been increasing moderately. The amount outstanding of CP and corporate bonds issued had been above the previous year''s level. Funding costs for firms had risen slightly. The year-on-year rate of growth in the money stock (M2+CDs) was around 2 percent.

Summary of Discussions by the Policy Board on Economic and Financial Developments

Economic Developments

On the current state of Japan''s economy, members concurred, based on economic indicators released in the intermeeting period, that the economy was expanding moderately as a trend, although the pace of growth seemed to be slowing temporarily mainly due to the drop in housing investment. Members also agreed that the mechanism of Japan''s economic growth remained in place and the economy was likely to continue expanding moderately, although the pace of growth was likely to slow for the time being. One member, however, said that, with regard to the virtuous circle of growth in production, income, and spending, some recently released data relating to income and spending needed to be examined.