Bank of Japan's December review of monetary and economic trends in Japan
BANK OF JAPAN, MONTHLY ECONOMIC REVIEW, 20/12/96.
A moderate economic recovery continues in Japan, as private demand shows increasing
firmness. With respect to final demand, public sector investment has peaked, but housing investment has
remained at a high level because of low interest rates. The decline in net exports has paused. Business
fixed investment is increasing steadily and a moderate increase also continues in personal consumption.
Meanwhile, inventories on the whole are at appropriate levels. In these circumstances, industrial
production growth is somewhat accelerating and corporate sentiment is improving gradually. Labor
market conditions have improved on the whole, although the unemployment rate has remained at a high
level. Meanwhile, the decline in prices is slowing gradually and monetary aggregates continue to grow at
3.0 - 4.0 per cent.
With regard to personal consumption, growth in sales of electrical appliances has been
high, particularly in personal computers and cellular phones, and passenger car sales (excluding compact
cars) have recently increased significantly. Outlays for travel have remained firm and sales at department
stores and supermarkets are increasing at a moderate pace.
Among leading indicators of business fixed investment, machinery orders are increasing
steadily albeit with some quarterly fluctuations. After the decline in the third quarter 1996, they are
expected to increase significantly in the fourth quarter. Construction floor area has also picked up
moderately. According to the Bank of Japan's Tankan -- Short-Term Economic Survey of Enterprises in
Japan of November 1996, business fixed investment plans of principal manufacturing firms for fiscal
1996 continued to increase at the same pace as those for fiscal 1995, while those of non-manufacturing
firms turned to increase for the first time in five years. As a result, business fixed investment of principal
firms overall is expected to expand at a faster pace than in fiscal 1995. Business fixed investment plans
of small firms (all industries) were revised upwards substantially from the August Tankan, marginally
exceeding the level of the previous year for the first time in five years. This shows that the recovery in
business fixed investment is spreading across a wider spectrum of industries and corporate sizes.
With respect to housing investment, housing starts have continued to grow reflecting low
interest rates and reasonable housing prices. It recorded a seasonally-adjusted annual rate of 1.82 million
starts in October 1996, the highest level since November 1973, partly reflecting the increase in orders in
September 1996 before the expected rise in the consumption tax.
Regarding public-sector investment, the volume of public works contracted has, since
spring 1996, stayed virtually unchanged from the level of the previous year as orders included in the
economic policy package of September 1995 subsided. Public works activities such as shipments of
related goods increased until summer 1996, reflecting time lags between the order and actual
implementation of public works. Recently, however, they have also peaked out.
Real exports have shown a moderate increase as the effects of the yen's depreciation
since summer 1995 have gradually become apparent after a time lag. Meanwhile, real imports have
continued to rise, in part supported by structural elements, e.g., the increased supply capacity of Asian
economies. However, the tempo of increase has somewhat slowed, which also reflects the depreciation of
the yen. Thus, both the real trade surplus and the nominal current account surplus declined rapidly until
the first half of 1996 but have been rising since summer 1996.
Industrial production increased steadily in the third quarter 1996 by an annual rate of
about 6 per cent and also rose significantly in October. These increases reflect the progress in inventory
adjustments and the continued increase in shipments of capital goods, which is closely related to business
fixed investment. They also reflect higher growth in domestic sales and exports of passenger cars which
have a large influence on production activities. Industrial production is expected to increase by an annual
rate of about 10 per cent in the fourth quarter 1996 on the whole.
The Tankan of November 1996 shows that the corporate profits of principal firms in both
the manufacturing (excluding petroleum refining) and non-manufacturing sectors are forecast to continue
increasing in fiscal 1996. Profit levels have risen particularly for manufacturing firms; the current
profit-to-sales ratio is expected to reach over 4 per cent for the first time in five years. In these
circumstances, business confidence of principal manufacturing firms improved moderately and is forecast
to continue its upward trend. In the assembly industry in particular, the percentage differential between
firms responding "favorable" and "unfavorable" has turned positive for the first time since February
1992. For non-manufacturing firms, business confidence has strengthened but it is forecast to weaken
somewhat in the near future. On average, business confidence of non-manufacturing firms is on an
upward trend. Small firms in both the manufacturing and non-manufacturing sectors are expected to
show continuing growth in profits in fiscal 1996. However, while business confidence of manufacturing
firms continues to improve moderately, that of non-manufacturing firms remains virtually unchanged
partly as a result of uncertainties about the outlook for public-sector investment.
Labor market conditions have improved somewhat on the whole. Although the
unemployment rate remains at a high level and employment growth is weak, overtime working hours
have increased, and the ratio of job offers to job applications has continued its gradual rise.
With respect to price developments, domestic wholesale prices (adjusted for seasonal
electricity rates) seem to have stopped declining although downward pressures from competition with
imports remain strong. This development was supported by the yen's depreciation to date, the rise in
crude oil prices and the improvement in domestic supply and demand conditions, particularly in
construction-related goods. Corporate service prices have declined, particularly in rents and leasing
charges, but the year-to-year decrease has become smaller. Consumer prices (nationwide, excluding
perishables) have stayed slightly above the previous year's level as commodity prices have continued to
fall gradually and service prices have risen somewhat.
Growth in monetary aggregates, measured in terms of the year-to-year growth rate of M2
+CDs average outstanding, has remained at 3.0 - 4.0 per cent, albeit with some fluctuations.
Regarding money market rates, the overnight call rate (uncollateralized) on the whole has
stayed below the official discount rate of 0.5 per cent. The 3-month CD rate has moved at around 0.5 per
cent. Meanwhile, with regard to the market's interest rate expectations, 3-month Euro-yen futures
declined at a somewhat brisk pace between the second half of July and autumn 1996, and have moved at
around 0.7 - 0.9 per cent since September 1996. As the market's expectations of higher interest rates
receded, the long-term government bond yield has declined since mid-July 1996, and recorded a
historical low of 2.34 per cent in early December. Recently, it has been moving at around 2.4 per cent.
With respect to bank lending rates, the short-term prime lending rate has remained at a
record low level of 1.625 per cent since September 1995. The long-term prime lending rate was lowered
by a total of 0.8 percentage points in September, October, and December to reach a record low of 2.5 per
cent, reflecting developments in long-term market rates. In these circumstances, short-term and long-term
average contracted interest rates on new loans and discounts have moved at record low levels.
On the stock exchange, the Nikkei 225 Stock Average had remained virtually unchanged
since summer 1996 at around ¥20,000 - 21,000, varying across firms. Recently, however, it has
weakened somewhat.
In the foreign exchange market, the yen's appreciation reversed its course and
depreciated against the U.S. dollar between summer 1995 and autumn 1996. Since early 1996, the yen
has continued to depreciate and has recently moved at around ¥114. Meanwhile, the yen depreciated
temporarily against the deutsche mark in October and November 1996, and has recently moved at around
¥72 - 73.