Bank of Japan's July report of
recent economic and financial developments1
Bank of Japan, Communication, 19 July 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, net exports (real exports minus real imports) continue to follow a
moderate upward trend due to steady developments in overseas economies, and public investment is
picking up reflecting the progress in the implementation of the supplementary budget for fiscal 1999.
As regards domestic private demand, business fixed investment is increasing. 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 the decreases in the number of employees and in
wages are slowing, while regular and overtime payments as well as new job offers are increasing in
line with the recovery in corporate activities.
As for the outlook, public investment is likely to start decreasing in the near future, 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
highgrowth 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 favourable financial
environment created partly by the Bank's monetary easing is expected to continue underpinning the
economy.
With regard to prices, import prices are decreasing slightly, reflecting a temporary decline in
international commodity prices such as crude oil prices. Domestic wholesale prices, notwithstanding
the fall in prices of electric machinery, are unchanged mainly due to the rise in prices of petroleum and
chemical products reflecting the increase in crude oil prices to date. Meanwhile, consumer prices
continue to be somewhat weak owing to the slight decrease in the prices of private-sector services and
the decline in prices of imported products reflecting the past appreciation of the yen. 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 has generally stayed near zero, and financial institutions
have been confident about the availability of overnight funds. The amount of funds outstanding in the
call money market has increased slightly.
Interest rates on term instruments have been increasing from mid-June reflecting a possible
termination of the zero interest rate policy. The Japan premium remains negligible.
Yields on long-term government bonds increased somewhat from mid-June and are recently moving
around 1.7 percent. The yield spread between private bonds (bank debentures and corporate bonds)
and government bonds remains mostly unchanged.
Stock prices fell towards mid-June, but have recovered thereafter along with the rise in US stocks.
In the foreign exchange market, the yen temporarily rose to around 104 yen in late June against the US
dollar, but then started to decline. The yen is currently being traded in the range of 107-109 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. Given this, major banks are becoming more active in extending loans,
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 increasing in parallel with a recovery in profits. Moreover,
firms continue to reduce 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. Issuance of corporate
bonds and CPs has been steady.
Money stock + CDs) grew slower in June compared with the previous month on a year-on-year
(M2
basis.
In this financial environment, the lending attitude of financial institutions is perceived by firms as less
severe, and corporate financing conditions are easing.