Bank of Japan's September report of
recent economic and financial developments1
Bank of Japan, Communication, 13 September 1999.
* * *
The Bank's View2
Japan's economy has stopped deteriorating, and there are some activities improving such as exports
and production. However, clear signs of a self-sustained recovery in private demand have not yet been
observed.
With regard to final demand, business fixed investment has been on a downward trend. Recovery in
private consumption continues to be weak on the whole. Housing investment, which had been
recovering, has recently peaked out. Meanwhile, public works have been rising, and net exports
(exports minus imports) have started growing due to an increase in exports.
Reflecting such developments in final demand and continued progress in inventory adjustment,
industrial production is turning to an increase. Against this background, corporate and consumer
sentiment has seen an improvement. The improvement in corporate sentiment, however, has not
necessarily stimulated business activities, because firms strongly feel that they have excess capacity
and employees and their profits remain weak. Meanwhile, the improvement in consumer sentiment is
underpinning household expenditure even under the worsening employment and income conditions,
but is not strong enough to push up overall private consumption.
As for the outlook, improvements in the overall financial environment partly due to the monetary
easing by the Bank, along with a series of economic measures taken by the government, are expected
to continue underpinning the economy. Moreover, the positive impact on domestic production of the
recovery of overseas economies, especially of Asian economies, is likely to continue for some time.
By contrast, leading indicators suggest a high probability of a moderate decrease in housing
investment from this autumn. In addition, under cautious sales plans, firms are implementing further
restructuring to improve their profitability. Although such corporate restructuring is expected to
improve productivity, it is likely, in the short run, to reduce fixed investment and discourage
household expenditure through the resulting deterioration in employment and income conditions.
Moreover, it seems that the recent appreciation of the yen will have an adverse effect on corporate
profits in the near term. Under such circumstances, it is still difficult to expect an immediate
self-sustained recovery in private demand. Overall economic developments require careful monitoring
in consideration of the above points. It is also important to promote structural reform in order to assure
the economy's sustained growth in the medium term.
With regard to prices, import prices have recently fallen slightly due to the appreciation of the yen,
despite the rise in international commodity prices such as crude oil prices. Domestic wholesale prices
are leveling off due to the progress in inventory adjustment as well as an increase in prices of some
products closely related to international commodities, such as those of petroleum products. Consumer
prices continue to be unchanged. Corporate service prices are still falling, although the pace of the
decline is slowing. For a while, movements of overall prices are likely to be flat, as the decline in
domestic commodity prices has come to a halt reflecting the rise in import prices to date. However,
substantial narrowing in the output gap led by a recovery in private demand is unlikely for the time
being, and wages continue to decline. Thus, downward pressure on prices is expected to remain.
In the financial market, the overnight call rate has stayed at nearly zero and financial institutions have
been confident about the availability of overnight funds. As for interest rates on term instruments,
short-term rates such as those of three months have weakened. However, longer-term rates maturing
beyond the year-end continue to be relatively high partly due to market participants' concern over the
Year 2000 problem.
The Japan premium has continued to be nearly zero for short-term transactions.
Yields on long-term government bonds rose to 2 percent in late August, but have recently fallen to
1.8-1.9 percent. The yield spread between government bonds and private bonds (bank debentures and
corporate bonds) has stopped narrowing.
Stock prices recovered the 18,000 yen level in late August, but subsequently declined against the
background of the appreciation of the yen and the weak tone in US stock prices. Currently, the prices
are around 17,500-18,000 yen.
The yen has appreciated further against the US dollar since mid-August to the current level of around
110 yen.
The amount outstanding of funds in the call money market has remained generally stable since the
middle of June. To date, this has not led to any difficulty in funds settlement, but close attention
should be paid to future market developments.
With regard to corporate finance, private banks have basically retained their cautious lending attitude.
However, constraint that had been caused by severe fund-raising conditions and insufficient capital
base has eased considerably. Under these circumstances, major banks have gradually become more
active than before in extending loans, while carefully evaluating the credit risks involved.
However, credit demand for economic activities such as business fixed investment remains weak. In
addition, some firms have recently been repaying their loans using their on-hand liquidity. As a result,
credit demand in the private sector has continued to be weak, and thus private banks' lending has
remained sluggish. Furthermore, the pace of issuance of corporate bonds and CP has generally been
slowing.
Money stock (M2+CDs) has shown a year-to-year increase of about 4 percent partly due to an increase
in fiscal expenditure.
In this financial environment, credit conditions have eased somewhat.
The following continue to warrant careful monitoring: how actively investors will take risks; how far
private banks will ease their lending stance; and how these changes will affect economic activities.