Bank of Japan's May report of recent economic and financial developments1
Bank of Japan communication, 21/5/98.
The Bank's view2
Japan's economy remains stagnant with continued strong downward pressures on
economic activities.
With respect to final demand, public-sector investment seems to have bottomed
out. However, growth in net exports has virtually peaked out as exports to other Asian countries
decline. Business fixed investment has been on the decline. Private consumption shows no sign
of recovery although the deterioration has slowed. Housing investment remains weak. Against
the background of weak final demand, inventories have accumulated further and industrial
production continues to decline. As a result, not only corporate profits but also employment and
income conditions have worsened significantly.
The above indicates that production, income, and expenditure show negative
interactions with one another. In these circumstances, the economic stimulus package was
decided, and the fiscal 1998 supplementary budget bill was submitted to the Diet. These
measures are expected to boost demand through additional fiscal expenditure and special income
tax-reduction and thereby alleviate the downward pressures on the economy. In order for the
Japanese economy to resume a self-sustained recovery, improvements in corporate and
household confidence are vital. Hence, the overall economic activity and the effects of the
economic stimulus measures should be carefully monitored.
With regard to prices, wholesale prices continue to fall, and the year-to-year
increase in consumer prices (excluding the effects of institutional changes such as the rise in the
consumption tax rate) has been declining close to zero. As for the future, the downward pressure
on domestic prices, induced by the decline in import prices including overseas commodity prices,
is weakening. Also, the expansion in the output gap in the economy is expected to slow as the
economic stimulus package is implemented. In the immediate future, however, prices are likely
to weaken reflecting the present high inventory level and the relatively large output gap.
In the financial markets, both long and short-term interest rates followed a
declining trend with the releases of weak economic indicators. Yields on long-term government
bonds have recorded a historical low and stock prices remain soft. The yield differential between
bonds issued by the private sector and those by the government, as well as the so-called "Japan
premium", has remained at the relatively high level and shown no significant decrease, indicating
the continuing cautious attitudes of market participants toward credit risk.
With respect to monetary aggregates, the growth in which had picked up
M2+CDs,
from the end of 1997, slowed in March and April. Also, the growth in broadly-defined liquidity
has been declining since the middle of 1997.
Private bank lending remains sluggish. Although corporate financing via the
capital markets and government financial institutions continues to expand, the increase in overall
corporate financing seems to indicate a clear slowdown under the stagnant economic conditions.
Banks remain cautious in extending loans with a view to improving their
medium-term profitability and financial soundness. In the capital markets, the difference in
fund-raising costs of firms has remained relatively large according to their creditworthiness. In
such circumstances, some firms, especially small and medium-sized firms, have been facing
difficult financing conditions and this influence on the economy continues to warrant a careful
monitoring.
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NB This BIS Review is available on the BIS World Wide Web site (http://www.bis.org).
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