Regarding the number of employees, in addition to the continued decrease in the manufacturing sector, a further deceleration of growth in the nonmanufacturing sector had been observed. As for prices, the year-on-year rate of increase in the consumer price index (CPI) for all items less energy and food, or the core CPI, had remained slightly over 2 percent.
The economy of the euro area continued to expand, although the pace of growth was slowing moderately. Business fixed investment was on an upward trend. However, exports were decelerating gradually, housing investment continued to decelerate, and due to the rise in energy and food prices and uncertainty about the outlook for the economy, private consumption was somewhat weak. In this situation, financial institutions had been tightening their lending standards. As for prices, the year-on-year rate of increase in the Harmonized Index of Consumer Prices (HICP) continued to be relatively high, reflecting the rise in energy and food prices. The U.K. economy continued to expand, albeit with a moderate slowing of the pace of growth.

In China, both domestic and external demand continued to expand strongly. India''s economy continued to show high growth, led mainly by domestic demand. The NIEs and ASEAN economies continued to expand at a moderate pace on the whole. In global financial markets, adjustments stemming from the U.S. subprime mortgage problem had been prolonged. In money markets, strains had eased compared with some time ago. However, repricing of securitized products had continued amid persisting market concerns about the effects of possible further losses that financial institutions might incur and of downgrading of monoline insurers, and credit spreads such as corporate bond spreads and credit default swap (CDS) premiums had widened further.

U.S. stock prices fell substantially at around the time of the previous meeting, and had stayed more or less unchanged thereafter. Long-term interest rates in the United States decreased significantly, due mainly to a """"flight to quality,"""" and had been more or less unchanged thereafter. In Europe, developments in stock prices and long-term interest rates had followed those in the United States. Developments in emerging economies had basically reflected those in the United States and Europe.

Economic and Financial Developments in Japan

Economic developments

Exports had continued to increase against the background of the expansion of overseas economies, rising again in the October-December quarter of 2007 from the previous quarter, in which they registered a substantial increase. Exports were expected to continue to rise, as overseas economies were likely to expand although at a slower pace. As for domestic private demand, business fixed investment had continued to trend upward and was expected to continue to do so since the increasing trend of domestic and external demand and the generally high level of corporate profits were likely to be maintained.

Private consumption had been firm. With regard to durable consumer goods, sales of electrical appliances had continued to increase. The number of new passenger-car registrations had been picking up since the summer of 2007, supported mainly by the successive introduction of new models. Sales at department stores and supermarkets, which primarily sold nondurable and semi-durable consumer goods, had been more or less unchanged on the whole. As for services consumption, outlays for travel had generally been firm, and sales in the food service industry had also been firm on the whole, although they had lost momentum compared with some time ago.

Consumer sentiment had become generally cautious, due mainly to rises in prices of daily necessities such as petroleum products and food products and the drop in stock prices, in a situation where the growth in wages had been sluggish. Private consumption was expected to follow a gradual uptrend, reflecting the gradual increase in household income. Housing investment had dropped substantially, affected by the coming into force of the revised Building Standard Law. However, the number of housing starts had shown signs of recovery, primarily in small-scale properties. Housing investment was expected to recover gradually, although, with the effects of the revision of the law persisting, it was likely to remain sluggish for the time being.

Production had continued to increase, reflecting the rise in domestic and external demand. In light of developments in demand both at home and abroad, production was expected to follow an increasing trend, although it was likely to be flat in the short run. Inventories had been more or less in balance with shipments. As for employment and income, 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 generally high.

On the price front, international commodity prices showed the following developments: crude oil prices had remained high; prices of crops such as wheat had also continued to increase; and prices of nonferrous metals had been softening since the fall of 2007, partly due to concerns about a further slowdown in the U.S. economy, but they had recently been more or less flat. 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 rising, and 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. 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 been more or less unchanged. 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 agreed on the following assessment: 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; the virtuous circle of growth in production, income, and spending remained basically intact, and the economy was likely to continue expanding moderately, although the pace of growth was likely to slow for the time being; however, due attention should continue to be paid to factors such as uncertainty regarding future developments in overseas economies and global financial markets, as well as the effects of high energy and materials prices.

Members agreed that, although overseas economies taken as a whole continued to expand, downside risks, particularly to the U.S. economy, had increased against the background of the continuing instability of global financial markets. Members shared the view that disruptions in global financial markets continued, reflecting downgrading of securitized products and further losses incurred by financial institutions. One member commented that money markets had been stable as seen in the fact that interest rates on term instruments had been declining since the end of 2007 due mainly to measures taken by central banks to provide liquidity to money markets. A few members, however, said that credit spreads such as corporate bond spreads and CDS premiums were widening, and stock prices were falling worldwide against the background of increased concerns about a further slowdown in the U.S. economy.

Members agreed that they needed to closely monitor developments in financial markets, which might be affected by financial statements of and capital reinforcement by U.S. and European financial institutions and ratings of U.S. monoline insurers. One member added that U.S. and European financial institutions were addressing the emergence of losses from securitized products swiftly. On the other hand, a different member expressed the view that market participants'' confidence in U.S. and European financial institutions had not been sufficiently restored even though they had increased their capital significantly. Some members said that there were concerns about possible further losses that financial institutions might incur due to declines in home prices and downgrading of monoline insurers.

With regard to the U.S. economy, members concurred that a slowdown in the economy had become more evident. Many members were of the view that the decline in home prices had accelerated due to inventories of unsold homes remaining elevated amid the continued decline in housing starts and sales. A few members added that it was still difficult to predict when the adjustments in the housing market would be completed. Members agreed that the slowing of the pace of increase in private consumption in the United States had recently become somewhat clearer, while business fixed investment remained on a gradual uptrend. Most members said that attention should be paid to the possibility that private consumption and business fixed investment would be affected by financial institutions'' application of tight lending standards to a broader range of borrowers.

A few members added that lending standards had been tightened especially sharply on commercial real estate loans, and this might adversely affect construction investment, which
had been strong. Some members noted that it was necessary to pay attention to how private consumption was influenced by the negative wealth effect stemming from the fall in prices of homes and stocks and by deterioration in consumer sentiment. Some members expressed the view that deceleration in production had begun to spread to other sectors beyond housing, as evidenced by the fact that production in the manufacturing sector had continued to be weak and that the Non-Manufacturing Index (NMI), compiled by the Institute for Supply Management (ISM), fell below 50 percent, the break-even point between improvement and deterioration in business conditions.

Regarding the employment situation, many members noted the downturn in nonfarm payroll employment in January. They expressed the view that, even taking into account the fact that this indicator tended to fluctuate widely from month to month, growth in the number of employees had recently been losing momentum further. With regard to the effects of macroeconomic policies, members agreed that they needed to carefully watch for the positive effects of tax cuts to be implemented and the monetary easing measures that had been taken so far on the U.S. economy going forward. On this point, one member said that the possibility warranted attention that households would use tax rebates to pay off their debts rather than to buy goods and services. A different member commented that attention should also be paid to the possibility that the effects of the monetary easing on private consumption would be limited, as the fall in home prices had been making it difficult for consumers to arrange refinancing of mortgage loans at a lower rate of interest.

As for prices, one member said that the year-on-year rate of increase in the CPI had stayed elevated reflecting the rise in energy and food prices, and thus there remained inflationary risks. With regard to European economies, members shared the view that the economy of the euro area continued to expand, although the pace of growth was slowing moderately.