Bank of Japan's May report of recent economic and financial developments1
Bank of Japan, 22 May 2002.
* * *
The Bank's View2
The pace of deterioration in Japan's economy has moderated, with production starting to pick up
reflecting the increase in exports and progress in inventory adjustment.
With regard to final demand, business fixed investment continues to decrease and private
consumption remains weak. Moreover, housing investment remains sluggish and public investment is
on a downtrend. Meanwhile, net exports (real exports minus real imports) are increasing due to the
recovery in overseas economies.
Industrial production is starting to pick up, reflecting the increase in exports and also the further
progress in inventory adjustment as a whole. However, firms are maintaining their stance on reducing
personnel expenses given persistently strong excessiveness in employment. Therefore, employment
and income conditions of households continue to worsen, reflecting the decrease in the number of
employees and the faster pace of decline in wages.
Turning to the outlook, with respect to domestic demand, business fixed investment is expected to
follow a downtrend for a while, judged mainly from leading indicators and firms' investment plans.
Private consumption is also likely to remain lackluster mainly due to worsening employment and
income conditions. In addition, government spending is basically projected to continue a downward
trend.
Meanwhile, as for exporting conditions, overseas economies, especially in the U.S. and East Asia, are
likely to follow a recovery path. The worldwide inventory adjustment in IT-related goods has come to
an end except for some goods such as networking equipment. Moreover, the yen is still lower than
where it was last autumn. Under these circumstances, exports are projected to continue a moderate
recovery. Industrial production is likely to follow a gradual uptrend supported by the increase in exports
and also by the progress in inventory adjustment. This increase in production will help corporate profits
to recover, particularly in the manufacturing sector, and is expected to gradually support domestic
private demand such as business fixed investment.
Overall, Japan's economy is projected to stop deteriorating as a whole since an increase in exports
and production will lead to an improvement in corporate profits and in turn, domestic private demand.
However, in addition to the weak employment and income conditions, the pace of increase in exports
and production is likely to remain modest on balance. Therefore, it will take a while for the positive
effects, stemming from the developments in exports and production, to spread across the
nonmanufacturing sector, small firms and households. With regard to the outlook for overseas
economies, an essential element for exports, there are various uncertain factors including the U.S.
economy, and the developments in crude oil prices and its effects on the global economy. Amid the
persisting fragility and uncertainty of the economy, continuous attention should be still kept in mind
that unstable movements in the foreign and domestic financial markets, including the foreign exchange
market, would easily exert a negative influence on the economy.
On the price front, import prices continue to rise mainly due to higher crude oil prices. Domestic
wholesale prices are almost flat recently since the decline in machinery prices and the reduction in
electricity charges are offset against the increase in import prices and the effects of the progress in
inventory adjustment. However, consumer prices and corporate service prices continue to decline.
As for the conditions surrounding price developments, past depreciation of the yen and the rise in
crude oil prices are regarded as factors to support prices for the time being. However, since domestic
demand is projected to remain weak for a time, the balance between supply and demand is expected
to keep exerting downward pressure on prices. Furthermore, factors such as the ongoing
technological innovations in machinery, deregulation, and the streamlining of distribution channels will
restrain prices. In addition, the faster pace of decline in wages may also work as a factor to push
prices downward, mainly in services prices which are sensitive to wage developments. Reflecting
these factors, domestic wholesale prices, which tend to be greatly affected by the exchange rate and
crude oil prices, are likely to be more or less flat for the time being. On the other hand, consumer
prices are expected to stay on a gradual declining trend.
As for the financial market, in the short-term money markets, the outstanding balance of the current
accounts at the Bank of Japan is recently moving around 15 trillion yen as the Bank continues to
provide ample liquidity to the money market.
In these circumstances, the overnight call rate continues to move around zero percent. Moreover,
interest rates on term instruments remain steady.
Yields on long-term government bonds are moving in the range of 1.3-1.4 percent recently. Yield
spreads between private bonds (bank bonds and corporate bonds) and government bonds are
contracting slightly. However, spreads between bonds with low credit ratings and government bonds
still remain wide.
Stock prices are level on the whole and are basically moving in the range of 11,000-12,000 yen.
In the foreign exchange market, the yen appreciated reflecting the overall downtrend in U.S. dollars
due mainly to weak U.S. stock prices.
With regard to corporate finance, private banks are becoming more cautious in extending loans to
firms with high credit risks while they continue to be more active in extending loans to blue-chip
companies. The lending attitudes of financial institutions as perceived by firms are becoming more
severe. In corporate bonds and CP markets, the issuing environment for firms with low credit ratings
continues to be severe on the whole, but the environment for firms with high credit ratings is improving
recently.
Credit demand in the private sector continues to follow a downtrend mainly because firms are
decreasing their business fixed investment while continuously reducing their debts.
Amid these developments, private banks' lending continues to decline by about 2-3 percent on a
yearon-year basis. The year-on-year growth rate of the amount outstanding of corporate bonds issued is
decreasing somewhat. The year-on-year growth rate of the amount outstanding of CP issued
continues to decline, although the amount is still well above the previous year's level.
The year-on-year growth rate of the monetary base in April increased further due partly to the
continued high liquidity demand even after entering the new fiscal year, reflecting a system failure of a
major bank group. The year-on-year growth rate of the money stock (M2 + CDs) remained around
3.5-4.0 percent.
Funding costs for firms continue to be at extremely low levels on the whole.
Overall, the recent financial environment remains extremely easy on the whole in terms of money
market conditions. The deterioration in the financial position of firms is coming to a halt. However, the
stance of investors toward firms with high credit risks remains severe and the lending attitudes of
private banks are becoming more cautious. Hence, the developments in the behavior of financial
institutions and corporate financing continue to require close monitoring.