Bank of Japan's monthly report of recent economic and financial developments
Central bank: boj | Type: speech | Date: 1999-12-28

## Bank of Japan's monthly report of recent economic and financial developments 1

## BANK OF JAPAN, COMMUNICATION, October 1998.The Bank's View 2Japan's economic conditions still continue to deteriorate.With

respect to final demand, public investment has bottomed out.

Net exp (exports minus imports) are basically increasing mainly due to a decline in imports.

Busi investment, however, has been decreasing significantly partly because of financial constr housing investment has declined further.

Private consumption has not yet shown a recovery the special income tax reduction.

Against this background of weak final demand, product been reduced substantially.

As a result, some industries have shown improvements in in adjustments, but the level of inventories is still high as a whole.

With the decline in ex production, corporate profits are worsening rapidly.

Furthermore, the employment and i conditions have deteriorated further as the unemployment rate marked a historical high decline in employee income has accelerated.

In these circumstances, corporate percept business conditions have worsened substantially and consumer sentiment has become cautious.As the above indicates, there remain continued negative interactions of prod income, and expenditure.

With the effects of the comprehensive economic stimulus package a recent monetary easing, the deterioration of the economy is expected to moderate graduall the second half of fiscal 1998.

Nevertheless, the economy is hardly expected to recover imm judged from the strong negative interactions mentioned above and the financial constraint financial institutions' cautious lending stance due to the nonperforming-loan problem. circumstances, there is an immediate need to rebuild the stability of the financial sys regard, bills related to financial revitalization have been legislated, and a bill re recapitalization, including policy measures to strengthen banks' capital base through injec funds, has passed the House of Representatives of the Diet.

It is desirable that funct confidence in Japan's financial system be restored based on these schemes.

Furthermor government is devising plans for economic recovery, including reduction in personal incom and corporate taxes as well as additional public investment.

It is important to materi measures promptly, in such a way that they not only have sizable direct effects on the ec also contribute to restore corporate and household confidence.With regard to prices, wholesale prices are on a downtrend reflecting the exp output gap, and consumer prices have fallen below the previous year's level.

With respe outlook, given the persistently strong negative interactions of production, income, and e the expansion in the output gap seems unlikely to cease despite the expected effect comprehensive economic stimulus package.

Furthermore, the continued decline in wages and recent appreciation of the yen may exert downward pressure on prices.

Hence, prices are li on a downtrend for some time.In the financial markets, responding to the further monetary easing by the B Japan on September 9, short-term interest rates declined as a whole after mid-September.

H since the end of September, the Japan premium has expanded and interest rates on Euro-yen d1This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on October 13, 1998.2The 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 in funding in foreign currencies over the year-end.

In the meantime, due to heightened uncert the economic outlook, long-term interest rates declined considerably.Stock prices continued a downtrend reflecting the concern over the worldwide market plunge, the further deterioration in economic indicators, and the persistent uncer the resolution of the problems with Japan's financial system.

In October, stock prices historically low levels since the bursting of the economic 'bubble'.

Meanwhile, in early Oc yen surged against the dollar with the emerged uncertainty over the outlook of the US econoWith regard to corporate finance, while funding needs for real economic act seem to be decreasing, some firms, especially large ones, are seeking to secure ample liquidity to prepare for unexpected situations.

Reflecting such increase in credit demand, rate in M 2 +CD has slightly recovered since the summer of 1998.However, Japanese financial institutions have become more cautious in exten loans, facing up severe fund-raising environments and deteriorating business conditions of companies.

While especially large firms are steadily increasing the issuance of commerci and corporate bonds, small and medium-sized firms and relatively low-rated ones continue difficult conditions for fund-raising in capital markets.

The influence of these seve conditions on business activities and on the economy continues to warrant careful monitorin