Bank of Japan's December report of
recent economic and financial developments1
Bank of Japan, Communication 21 December 1999.
* * *
The Bank's View2
Japan's economy, which had stopped deteriorating, has recently started to improve, with exports and
production increasing. The economic environment surrounding private demand is gradually
improving, as seen in the continuing increase in corporate profits. However, clear signs of a
selfsustained recovery in private demand have not been observed yet.
With regard to final demand, housing investment has recently peaked out, and public investment
seems to have stopped rising. Recovery in private consumption continues to be weak through lack of
notable improvements in employment and income conditions. Business fixed investment, which had
been on a downward trend, shows signs of leveling off. Meanwhile, net exports (real exports minus
real imports) continue to expand due to an upturn in overseas economies.
Reflecting such developments in final demand and continued progress in inventory adjustment,
industrial production remains on an uptrend and an increase in corporate profits is becoming distinct.
In this situation, corporate sentiment continues to improve. Regarding the employment condition,
there are some indicators that suggest a slowdown of decrease in the number of employees. The
positive developments in corporate profits and sentiment, however, have not necessarily stimulated
business activities, because firms still strongly feel that they have excess capacity and employees and
that they should reduce their debts to restore financial soundness. In addition, efforts by firms to
reduce personnel expenses have prolonged the severity of households' income conditions.
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
and have favorable effects on corporate profits and then on household income. By contrast, it is highly
probable that housing investment will remain flat for the time being. In addition, firms are expected to
maintain a cautious stance toward business fixed investment based on their modest prospects for sales,
although corporate restructuring is improving profitability to some extent. Moreover, it seems that the
appreciation of the yen since the summer will have an adverse effect on corporate profits in the near
term. In these circumstances, future economic developments still require careful monitoring in spite of
the gradual recovery in the environment for private demand. Furthermore, it is important to promote
structural reform in order to facilitate a recovery in private demand.
With regard to prices, import prices are declining somewhat due to the appreciation of the yen.
Domestic wholesale prices, notwithstanding the fall in prices of electric machinery, are flat mainly due
to the rise in prices of petroleum and chemical products reflecting an increase in crude oil prices.
Consumer prices remain unchanged. Corporate service prices are still falling slowly. As for the
outlook, overall prices are likely to be flat for the time being despite the continued fall expected in
prices of some machinery. This is because the supply-demand balance is improving gradually, as
shown in the decline in inventories, and because the rise in crude oil prices to date will continue to be
passed on to prices of other products for a while. However, attention should still be paid to the
downward pressure on prices, as clear signs of a self-sustained recovery in private demand have not
yet been observed and wages continue to fall.
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. The amount outstanding of funds in the call
money market has increased slightly as transactions are becoming active with the year-end
approaching.
As for interest rates on term instruments, rates maturing beyond the year-end rose until the beginning
of December mainly due to the influence of the Year 2000 problem, but plunged subsequently as
financial institutions made progress in securing year-end funds amid ample funds provision by the
Bank of Japan.
The Japan premium has almost disappeared even for transactions maturing beyond the year-end.
Yields on long-term government bonds rose slightly to nearly 1.9 percent from the middle of to late
November reflecting improved confidence in the economy, but then fell back due to the yen's
appreciation and other factors, and are presently ranging between 1.70-1.75 percent. The yield spread
between private bonds (bank debentures and corporate bonds) and government bonds continues
narrowing, primarily that between private bonds with relatively low credit ratings and government
bonds.
Stock prices, after rising in November against the background of improved confidence in the economy
and firmness of U.S. stock prices, weakened slightly due to the strengthening of the yen and other
factors, and are currently moving around 18,000-18,500 yen.
In the foreign exchange market, the yen appreciated further against the U.S. dollar in late November,
and is recently been traded in the range of 102-104 yen.
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 are gradually becoming more
active 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 been trying to reduce debts using their on-hand liquidity. As a result, credit
demand in the private sector has continued to be basically stagnant, and thus private banks' lending
has remained sluggish. Corporate bond issuance has been steady. Meanwhile, CP issuance is
increasing with the year-end approaching.
The growth of money stock has slowed somewhat mainly due to the weakness in credit
(M2+CDs)
demand in the private sector.
In this financial environment, the financial position of firms is easing, and the lending attitude of
financial institutions as perceived by firms is becoming less severe. It continues to warrant careful
monitoring how these favorable developments in corporate financing environment will affect
economic activities.