Bank of Japan's June report of recent economic and financial developments1
Bank of Japan, 18 June 2001
* * *
The Bank's view2
Adjustments in economic activities are gradually intensifying, as production is declining substantially
reflecting a fall in exports.
With regard to final demand, the recovery in private consumption continues to be weak as a whole, but
there are somewhat positive signs in some indicators. Housing investment is declining. Public
investment is increasing. On the other hand, net exports (real exports minus real imports) continue to
decrease, reflecting not only a slowdown in overseas economies such as those of the United States
and East Asia but also sluggish demand for information technology (IT) related goods. Business fixed
investment is starting to decrease while exporting conditions continue to deteriorate.
Industrial production continues to decline sharply, reflecting such developments in final demand and a
further buildup of excess inventories of electronic parts and some materials. The environment
surrounding corporate profits is becoming more severe in line with the substantial decline in exports
and production, and business sentiment is worsening particularly in manufacturing. Income conditions
of households have not yet deteriorated, but the decline in production is starting to affect the
household sector mainly through the decrease in hours worked.
As for the outlook, public investment is likely to continue increasing for the time being but is expected
to start declining in the near future. Net exports, however, are likely to continue decreasing for a while
amid the deceleration in overseas economies and ongoing inventory adjustments in IT-related goods
worldwide. Judged from leading indicators and investment plans of firms, business fixed investment is
projected to follow a downward trend. In addition, inventory adjustments in goods such as electronic
parts and materials will continue for the time being. Industrial production is, therefore, expected to
follow a declining trend. In these circumstances, corporate profits are likely to start decreasing and
thus household income is expected to weaken gradually.
Overall, the adjustments, mainly in production, are likely to continue for some time. Among factors
affecting exports, it is generally thought that inventory adjustments in IT-related goods are expected to
finish by early fall and overseas economies, particularly the United States, will follow a gradual
recovery trend from around the end of this year. In this case, exports are expected to underpin the
economy once again. However, a prolonged deceleration of overseas economies could yield the risk
of economic adjustments spreading further. Also, attention should be paid to the risk of a negative
impact on the economy induced by developments in foreign and domestic capital markets via
corporate and household confidence.
With regard to prices, import prices are rising, mainly reflecting the rebound in crude oil prices in
addition to the prior depreciation of the yen. Domestic wholesale prices are declining mainly due to the
decrease in prices of electrical machinery. Consumer prices continue to be somewhat weak owing to
the decline in prices of imported products and their substitutes. Corporate service prices continue to
decrease.
As for the conditions surrounding price developments, the prior yen depreciation is exerting upward
pressure on prices. However, with the ongoing adjustments in economic activities, the balance
between supply and demand in the domestic market is likely to exert downward pressure on prices.
Furthermore, in addition to the declining trend of machinery prices caused by technological
innovations, the decreases in the prices of goods and services reflecting deregulation and the
streamlining of distribution channels will continue to restrain price developments. Overall, prices are
expected to be weak for the time being. Moreover, given the high degree of uncertainty regarding
future economic developments, the possibility that weak demand will intensify downward pressure on
prices warrants careful monitoring.
1
This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on
June 14 and 15, 2001.
In the financial market, the overnight call rate is basically moving at about 0.01 percent under the
guideline for money market operations to maintain the current-account balance at the Bank of Japan
at around 5 trillion yen.
Interest rates on term instruments are level on the whole. The Japan premium remains negligible.
Yields on long-term government bonds recently decreased to 1.1-1.2 percent after remaining flat at
1.2-1.3 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and
government bonds are mostly unchanged or contracting somewhat.
Stock prices continue to be weak, reflecting the somewhat more cautious views of market participants
toward future corporate profits.
In the foreign exchange market, the yen appreciated against the U.S. dollar toward early June, but has
weakened thereafter and is currently being traded in the range of 120-123 yen to the U.S. dollar.
With regard to corporate finance, private banks continue to be more active in extending loans, mainly
to blue-chip companies, while carefully evaluating the credit risks involved. However, there are some
signs indicating that the lending attitude of financial institutions perceived by small firms is becoming
slightly more cautious. Meanwhile, the fund-raising conditions of firms in the markets for such
instruments as corporate bonds and CP are improving further owing to the decline in market interest
rates and the more active stance of investors to take credit risks.
On the other hand, credit demand of private firms continues to lack momentum as the level of
corporate expenditures such as business fixed investment remains below firms' cash flow. Moreover,
firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result,
credit demand in the private sector has continued to be basically stagnant.
In view of this, the underlying tone of private banks' lending remains sluggish. The growth rate of
amount outstanding of corporate bonds issued is slightly below 2 percent year-on-year. The amount
outstanding of CP issued is well above that of the previous year and marking the highest level to date,
reflecting the favorable environment for issuing CP.
The growth rate of money stock (M2 + CDs) in May was higher than that of the previous month due
mainly to the inflow from postal savings.
Funding costs for firms are on a declining trend reflecting developments in market interest rates.
In this financial environment, the lending attitude of financial institutions and corporate financing
conditions remain easy as a whole. For the time being, attention should be paid to the effects of the
monetary easing measures taken by the Bank, while careful monitoring is required for the effects of
stock price developments and corporate profit conditions on the behavior of financial institutions and
the fund-raising conditions of firms.