Bank of Japan's September report of recent economic and financial
developments1
Bank of Japan, Communication, 18 September 2000.
* * *
The Bank's view2
Japan's economy is recovering gradually, with corporate profits and business fixed investment
continuing to increase.
With regard to exogenous demand, public investment is about to decrease since the implementation of
the supplementary budget for fiscal 1999 has peaked out. Net exports (real exports minus real imports)
continue to follow a moderate upward trend due to steady developments in overseas economies. As
regards domestic private demand, business fixed investment is on an increasing trend. The recovery in
private consumption continues to be weak as a whole through lack of notable improvements in
employment and income conditions, although there are somewhat positive signs in some indicators.
Housing investment is mostly unchanged.
Reflecting such developments in final demand, industrial production is increasing. Corporate profits
and sentiment continue to improve, and the number of firms that take positive action, such as
increasing the amount of fixed investment, is increasing, especially in high-growth sectors. Income
conditions of households still remain severe but regular and overtime payments as well as new job
offers continue to increase in line with the recovery in corporate activities, and compensation of
employees has stopped decreasing.
As for the outlook, public investment will decrease, but net exports are expected to continue
increasing gradually, reflecting the expansion in overseas economies. In the corporate sector, firms
still strongly feel that they have excess equipment and that they should reduce their debts to restore
financial soundness. However, it is very likely that fixed investment in high-growth sectors, including
those related with information technology services, will increase as corporate profits continue to
recover. Moreover, an improvement in corporate profits will increase household income and this in
turn is expected to boost private consumption. However, the pace of recovery in household income
will be modest for the time being, since firms' perceptions of excess employment still persist, and thus
significant changes have not been observed in their efforts to reduce personnel expenses. Overall, the
economy is likely to recover gradually led mainly by business fixed investment, unless there are major
adverse external shocks. In addition, the favorable financial environment created partly by the Bank's
sustaining easy monetary stance is expected to continue underpinning the economy.
With regard to prices, import prices are rising, reflecting an increase in international commodity prices
such as crude oil prices since April. Domestic wholesale prices, notwithstanding the rise in prices of
petroleum products reflecting the increase in crude oil prices, are mostly unchanged mainly due to the
decrease in prices of electric machinery. Meanwhile, consumer prices continue to be somewhat weak
owing to the decline in prices of imported products reflecting the past appreciation of the yen,
although prices of petroleum products and electricity increased from the rise in crude oil prices.
Corporate service prices are still falling slowly.
As for the outlook on prices, downward pressure on prices stemming from weak demand is declining
significantly while an economic recovery is expected to continue moderately. Upward pressure on
prices is likely to arise temporarily from the increase in crude oil prices. On the other hand, in addition
to the declining trend of machinery prices due to technological innovations, the decline in prices of
consumer goods arising from the past appreciation of the yen and the streamlining of distribution
channels will exert downward pressure on prices. Thus, prices overall are expected to be stable or
weak somewhat.
In the financial market, the overnight call rate rose in response to the decision at the Monetary Policy
Meeting held on 11 August to change the guideline for money market operations,3 and is generally
moving around 0.25%. The amount of funds outstanding in the call money market has increased.
Interest rates on term instruments increased towards the end of August, reflecting the termination of
the zero interest rate policy, and has been mostly stable thereafter. The Japan premium remains
negligible.
Yields on long-term government bonds followed an upward trend from the second half of August and
rose temporarily to 1.95-2.0%, but is recently moving in the range of 1.8-1.9%. The yield spread
between private bonds (bank debentures and corporate bonds) and government bonds remains mostly
unchanged as a whole.
Stock prices rose from mid- to end-August but started to fall from late August and are recently moving
around the level observed during mid-August.
In the foreign exchange market, the yen-dollar exchange rate rose temporarily to around 109-110 yen
in mid-August, but the yen appreciated thereafter. The yen is currently being traded in the range of
106-108 yen to the US 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.
On the other hand, the improvement in economic activities has not stimulated corporate demand for
external funds, since firms' cash flow is at a high level in parallel with recovery in profits. 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. Recently, however, the
expansion in the year-to-year decline seems to be ceasing. Issuance of corporate bonds and CPs has
been steady.
Money stock (M2 + CDs) grew slower in August compared with the previous month on a year-on-year
basis.
Recently, funding costs for firms are increasing, albeit gradually, due to the rise in money market rates
after the termination of the zero interest rate policy.
In this financial environment, there seem to be no substantial changes in the lending attitude of
financial institutions and easing of corporate financing conditions.