Bank of Japan's November report of recent economic and financial developments in Japan  (Central Bank Articles and Speeches, 17 Nov 98)
Central bank: boj | Type: speech | Date: 1998-11-17

## Bank of Japan's November report of recent economic and financial developments in JapanBANK OF JAPAN, COMMUNICATION, 17/11/98.

## The Bank's View 1Japan's economic conditions still continue to deteriorate.With respect to final demand, public investment orders have increased significantly.

Ne (exports minus imports) seem to be basically on an upward trend.

Business fixed inve however, has been declining under increasingly severe conditions for firms' fund-raising. investment has also declined further.

In addition, private consumption has shown some we Against this background of weak final demand, production has been reduced substantially result, inventories are decreasing, but the ratio of inventory to sales remains high due shipments.

With the decline in expenditure and production, corporate profits continue to wo employee income is decreasing.

Employment and income conditions have deteriorated as the ra job offers to applications has recorded a historical low and the unemployment rate remains level.As the above indicates, there remain continued negative interactions of production, inc expenditure.

In addition, there is a growing concern among firms for fund availability ends of the calendar year and the fiscal year, given the increasingly cautious lending financial institutions and the mounting difficulty in fund-raising in the capital market.With the effects of the comprehensive economic stimulus package and the recent monetary e the deterioration of the economy is expected to moderate gradually.

Nevertheless, the ec hardly expected to recover immediately, judged from the strong negative interactions constraints from corporate finance mentioned above.

Moreover, the appreciation of the ye early autumn may exert pressures on corporate profits for the latter half of the fiscal ye is a growing uncertainty in financial and economic developments overseas.

These additional also need careful monitoring.

In the above circumstances, a new legal framework to reb stability of the financial system was established in October.

It is desirable that, b framework, banks' capital base should soon be strengthened sufficiently to restore confidence.

Furthermore, the government is planning to launch emergency economic measures the middle of November.

The materialization of these measures and their effects on corpo household sentiment should be carefully monitored.With regard to prices, wholesale prices are on a downtrend reflecting the continued expans output gap.

Corporate service prices are weakening further, and consumer prices have fall the previous year's level.

Given the persistently strong negative interactions of producti and expenditure, the expansion in the output gap is unlikely to cease despite the expecte the comprehensive economic stimulus package.

Furthermore, the continued decline in wages an appreciation of the yen since early autumn will exert downward pressure on prices.

Hen decline in prices, especially in wholesale prices, may somewhat accelerate in the future.In the financial markets, interest rates on Euro-yen deposits maturing after the year-end r middle of October.

This is partly because Japanese financial institutions--facing the severity in raising foreign currency funds as reflected in the expansion of the Japan prem raised yen funds vigorously to turn over the funds to foreign banks in exchange for1 The Bank's view on recent economic and financial developments, determined by the Policy Board Monetary Policy Meeting held on November 13, as the basis of monetary policy decisions.currencies.

Meanwhile, Treasury bill (TB) rates lowered close to zero with an increas purchase by foreign banks that had raised yen funds at very low rates.The interest rate differential between Euro-yen deposits and TBs expanded considerably in with the heightened market concern over Japanese banks' foreign currency liquidity risk at end.

Recently, however, the anxiety about worldwide credit crunch, which had once intens international financial markets, appears to be alleviated, and Japanese banks have considerable progress in raising foreign currency funds.Stock prices have rebounded slightly, reflecting favorable market sentiments toward the e of laws aiming to stabilize and revitalize Japan's financial system and the movement of bu ups and restructuring in the financial industry.

However, looking at the recent developmen and stock markets as a whole, market participants seem to remain cautious over the outloo economy.With regard to corporate finance, firms are further seeking to secure ample on-hand l Reflecting such increase in credit demand, the growth rate in M 2 +CD continued to show a slight increase in September.Meanwhile, Japanese private banks have taken more cautious attitude in extending loans, severe fund-raising environments and deteriorating business conditions of borrower com Particularly as the year-end nears, their cautious lending attitude seems to be adversely only small and medium-sized firms but also large ones.In commercial paper and corporate bond markets, issuance rate differentials are further across firms according to their creditworthiness.

The development of severe corporate conditions toward the year-end and their influence on the economy continue to warrant monitoring.