Bank of Japan's March report of recent economic and financial developments1
Bank of Japan, 21 March 2001.
* * *
The Bank's view2
The recovery in Japan's economy has recently come to a pause, reflecting a decrease in exports.
With regard to domestic demand, business fixed investment is increasing. The recovery in private
consumption continues to be weak as a whole, but there are somewhat positive signs in some
indicators. Housing investment is virtually unchanged. Public investment is bottoming out.
While domestic demand remains steady, net exports (real exports minus real imports) are plummeting
reflecting a sharp slowdown in overseas economies such as in the U.S. and East Asia. Mainly due to
these developments, industrial production is starting to decline, and inventories of some materials and
electronics parts are becoming excessive. Corporate profits continue to improve but the pace is
thought to be slowing significantly, particularly in the manufacturing industries, as exports and
production are recently weakening. Income conditions of households have not deteriorated but the
effects of the decline in production are starting to be observed in new job offers and overtime working
hours.
As for the outlook, public investment is expected to start increasing with the advance in the
implementation of the supplementary budget for fiscal 2000. Net exports, however, are likely to
continue decreasing for a while, as adjustments in overseas economies will take some time. Leading
indicators suggest that business fixed investment is likely to peak out gradually, although there will be
a backlog of orders to be implemented for a while. In addition, the need for inventory adjustments,
although not to a large extent, is heightening for some goods. Thus, industrial production is expected
to follow a declining trend. In these circumstances, the increase in corporate profits is likely to be
subdued, and recoveries in household income and consumption are projected to be sluggish.
Overall, the economy will likely remain stagnant for some time. Meanwhile, it is generally thought that
overseas economies, particularly the U.S., will follow a gradual recovery trend from the latter half of
2001. In this case, together with the effects from the depreciation of the yen, exports are expected to
underpin the economy once again. However, attention should still be paid to the possibility of a
prolonging deceleration of overseas economies and risks of a negative impact on the economy
induced by developments in foreign and domestic capital markets through corporate and household
confidence.
With regard to prices, import prices are rising, mainly reflecting the depreciation of the yen. Domestic
wholesale prices are declining somewhat 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 are falling slowly.
As for the conditions surrounding price developments, the recent yen depreciation is exerting upward
pressures on prices. However, given the pausing economy as well as the heightening excessiveness
of inventories, albeit the latter is observed only for some goods, the balance between supply and
demand in the domestic market is likely to exert downward pressures on prices. In addition, the
declining trend of machinery prices caused by technological innovations, the decrease in prices of
consumer goods arising from the streamlining of distribution channels, and the reduction in
communications fees aided by deregulation will continue to restrain price developments. Overall,
prices are expected to be somewhat weak for the time being. Moreover, given the high uncertainties
regarding future economic developments, possibilities that weak demand will intensify downward
pressures on prices warrant careful monitoring.
In the financial market, the overnight call rate generally moved around 0.25 percent in February, and is
moving around 0.15 percent from March in response to the decision at the Monetary Policy Meeting
held on February 28 to change the guideline of money market operations.3
Interest rates on term instruments are declining substantially due to the announcement of the
improvements in the way of liquidity provision and monetary easing by the Bank. The Japan premium
remains negligible.
Yields on long-term government bonds have declined to 1.1-1.2 percent due to the even more
cautious view of market participants towards the economic outlook. The yield spreads between private
bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged or
expanding somewhat.
Stock prices dropped substantially reflecting the decline in U.S. stock prices and the downward
revision of the outlook on firms' profits.
In the foreign exchange market, the yen depreciated again from the end of February. The yen is
currently being traded in the range of 122-124 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. There seem to be no
significant changes in the fund-raising conditions of firms in the markets for such instruments as
corporate bonds and CP.
On the other hand, credit demand of private firms continues to lack momentum as corporate demand
for external funds is subdued, since firms' cash flow is at a high level. 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, although the
year-onyear rate of decrease moderated somewhat in January and February. Meanwhile, the amount
outstanding of corporate bonds issued continues to be slightly above the previous year's level. The
amount outstanding of CP issued remains at a high level.
Recently, the growth rate of money stock + CDs) is increasing reflecting the inflow from postal
(M2
savings.
As for funding costs for firms, both short- and long-term funding rates are declining reflecting the
decrease in market interest rates.
In this financial environment, the lending attitude of financial institutions and corporate financing
conditions remain easy. However, the effects of the decline in stock prices on the behavior of financial
institutions and the fund-raising conditions of firms need to be carefully monitored.