Bank of Japan presents its quarterly economic outlook for summer 1997
BANK OF JAPAN, QUARTERLY BULLETIN, August 1997 (advance summary).
1. Japan's economy continues on a moderate recovery trend. Production and
income are showing underlying firmness despite the continued reaction to the temporary surge in
demand ahead of the consumption tax hike. Among final demand items, public-sector
investment has been on a decreasing trend, and housing investment has been somewhat
lackluster, particularly as a result of the reaction to the rise in demand ahead of the consumption
tax hike. On the other hand, net exports have recently increased significantly and business fixed
investment has been rising steadily. Despite the continued decline in demand which followed
the rise ahead of the consumption tax hike, particularly in consumer durables, the recovery trend
in personal consumption does not seem to have been hindered. In these circumstances, industrial
production has been firm and the growth in employees' income has been rising steadily, albeit
moderately.
Price indices were pushed up in April 1997 by the consumption tax hike, but
excluding this factor, prices have been stable. Both quarter-to-quarter and year-to-year changes
in domestic wholesale prices (adjusted for seasonal electricity rates) have been near zero, and the
year-to-year declines in corporate service prices have narrowed. The year-to-year rises in
consumer prices (nationwide, excluding perishables) are widening somewhat, albeit by a small
margin. Changes in commercial land prices have varied by type, and residential land prices have
virtually stopped declining.
2. In the financial markets, the overnight call rate (uncollateralized) stayed
slightly below the official discount rate of 0.5 per cent. The long-term government bond yield
rebounded to near 2.7 per cent in late May, as market uncertainties about the economic outlook
and the Japanese financial system gradually subsided after the second half of April. However, it
declined to around 2.2 - 2.3 per cent. Stock prices rose to ¥20,000 - 21,000 in May and June
1997, and have recently been fluctuating without showing clear direction. In the foreign
exchange market, the yen reached ¥127 to the U.S. dollar in early May, but later appreciated and
has recently moved at around ¥113 - 116 to the U.S. dollar.
With respect to the fund-raising activities by firms, growth in bank lending
continues to be lackluster but fund-raising through the capital market has been high, particularly
in straight bonds. Growth in monetary aggregates in terms of M2 + CDs year-to-year average
outstanding has continued at around 3.0 per cent.
3. Looking at individual components of final demand, public-sector
investment will be supported by implementation of public works included in the government's
supplementary budget for fiscal 1996 for the time being, but it is expected to follow a declining
trend. Net exports, on the other hand, are likely to continue to be steady even after the recent
large increase. This reflects the robust increase in overseas demand, and the recovery in the
price competitiveness of Japan's manufacturing industry supported by the yen's depreciation
until early spring.
In these circumstances, corporate profits on the whole are expected to continue
improving in fiscal 1997 although with varied strength across sectors. Business fixed investment
is also expected to continue increasing, mainly reflecting 1) increases in corporate profits,
2) further progress in capital stock adjustments, and 3) the rise in information-related
investment. However, because of the remaining balance-sheet adjustment pressures and the
absence of leading industries, the increase in business fixed investment is unlikely to gather
significant momentum for the time being.
The growth in the employees' income has been rising gradually owing to the
increase in bonus payments and the moderate recovery in employment growth, reflecting the
improvement in the labor market conditions. This shows that the recovery in the business sector
has spread to the household sector. Thus, recovery in personal consumption is expected to
continue after the reaction to the rise in demand ahead of the consumption tax hike subsides in
the near future. However, the pace of recovery is likely to be moderate considering the increases
in the tax burden, such as the rise in the consumption tax. Meanwhile, housing investment,
which is in a generally favorable environment including low interest rates, is expected to recover
somewhat in the second half of fiscal 1997, although it has recently been weak reflecting the
reaction to the surge in demand ahead of the consumption tax hike.
4. With respect to price developments, the downward pressure on domestic
prices from the increase in manufactured imports has weakened, as the rise in import penetration
rate has paused. On the other hand, the upward pressure on import costs from materials prices
has also subsided owing to the decline in crude oil prices since spring 1997 and the appreciation
of the yen. Thus, import prices are not exerting significant upward nor downward pressure on
domestic prices. Meanwhile, final demand will continue to recover on the whole, but the output
gap is unlikely to narrow significantly as the pace of recovery in final demand is expected to be
moderate. In these circumstances, prices are expected to be stable for some time.
5. In sum, the positive cycle among production, income and expenditure
continues steadily and is reflected in the improvement in corporate profits and the rise in
employees' income. Thus, despite the restraining pressures from fiscal policies, including the
consumption tax hike and the decline in public-sector investment, Japan's economy is expected
to continue its recovery, supported by the yen's depreciation until early spring and the expansion
of information-related demand. However, the economic recovery is unlikely to gather
significant momentum, as a result of fragility in some sectors, as well as the continued
balancesheet adjustment pressure. In these circumstances, building an economic environment which
increases the confidence of the private sector is vital to strengthening the economic recovery. In
this process, effective structural reforms to draw out the dynamism inherent in the economy
continue to be essential in addition to appropriate macroeconomic policies.