Bank of Japan's August report of recent economic and financial developments1
Bank of Japan, 15 August 2001
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The Bank's view2
Adjustments in economic activities are intensifying further, reflecting a substantial decline in exports
and production.
With regard to final demand, private consumption remains flat on the whole. Housing investment is
declining and public investment is also starting to decrease since the implementation of the
supplementary budget for fiscal 2000 has peaked out. Net exports (real exports minus real imports)
continue to decline, reflecting not only a slowdown in overseas economies but also sluggish demand
for IT-related goods. Business fixed investment is also decreasing while exporting conditions continue
to deteriorate.
Industrial production continues to decline sharply, reflecting such developments in final demand and
strong excessiveness in inventories of electronic parts and some materials. Corporate profits and
business sentiment are also worsening particularly in manufacturing. Affected by such developments,
household income seems to be weakening gradually.
As for the outlook, public investment is expected to follow a declining trend. Net exports are likely to
continue decreasing for a while amid the deceleration in overseas economies and ongoing inventory
adjustments in IT-related goods worldwide. Judged from leading indicators and investment plans of
firms, business fixed investment is projected to follow a downward trend. In addition, inventory
adjustments in goods such as electronic parts and materials will continue for the time being. Industrial
production is, therefore, expected to follow a declining trend.
There still exist such general views that around the end of this year, ongoing inventory adjustments in
IT-related goods worldwide are likely to peak out and overseas economies, particularly the United
States, will start to recover. Based on these preconditions, exports are expected to pick up sometime
in the future and thus underpin industrial production. However, cautious views on global demand in
IT-related goods and developments in overseas economies for both their timing and pace of recovery
are recently growing. At home, under the prolonged adjustments in economic activities particularly in
production, household income, which is the basis of private consumption, is likely to be weakening
gradually along with the decline in corporate profits.
Overall, it seems to be inevitable that adjustments in economic activities, starting from the decrease in
exports, will continue for the time being. Moreover, the substantial decline in production would cause
domestic demand to decrease and in turn generate the risk of adjustments in economic activities to
spread even further. Also, attention should be paid to the risk a negative impact on the economy
induced by developments in foreign and domestic capital markets via corporate and household
confidence.
With regard to prices, import prices are mostly unchanged. Domestic wholesale prices are weak
mainly due to the decrease in prices of electrical machinery and materials. Consumer prices continue
to be somewhat weak owing to the decline in prices of imported products and their substitutes.
Corporate service prices continue to decrease.
As for the conditions surrounding price developments, the past yen depreciation is exerting upward
pressure on prices. However, with the ongoing adjustments in economic activities, the balance
between supply and demand in the domestic market is likely to exert downward pressure on prices.
Furthermore, in addition to the declining trend of machinery prices caused by technological
innovations, the decreases in the prices of goods and services reflecting deregulation and the
streamlining of distribution channels will continue to restrain price developments. Overall, prices are
expected to be weak for the time being. Moreover, given the high degree of uncertainty regarding
future economic developments, the possibility that weak demand will further intensify downward
pressure on prices warrants careful monitoring.
In the financial market, the overnight call rate is basically moving around zero percent under the
guideline for money market operations to maintain the current-account balance at the Bank of Japan
at around 5 trillion yen.
Interest rates on term instruments are basically level on the whole. The Japan premium remains
negligible.
Yields on long-term government bonds rose temporarily to 1.40-1.45 percent, but are recently moving
around the range of 1.30-1.35 percent. The yield spreads between private bonds (bank debentures
and corporate bonds) and government bonds are contracting somewhat.
Stock prices are declining around the lowest level since the start of the year.
In the foreign exchange market, the yen is currently being traded in the range of 121-124 yen to the
U.S. 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. However, there are some
signs indicating that the lending attitudes of financial institutions perceived by small firms are
becoming slightly more cautious. Meanwhile, the fund-raising conditions of firms in the markets for
such instruments as corporate bonds and CP continue to improve owing to a decline in market interest
rates and the more active stance of investors to take credit risks.
On the other hand, credit demand in the private sector seems to be declining slightly faster due to a
decrease in business fixed investment while firms continue to reduce their debts.
In view of this, private banks' lending remains sluggish. Meanwhile, the growth rate of amount
outstanding of corporate bonds issued is on the gradually rising trend, reflecting the favorable
environment for issuing corporate bonds. The amount outstanding of CP issued is well above that of
the previous year and marking the highest level to date.
The growth rate of money stock (M2 + CDs) in July was slightly higher than that of the previous month
due mainly to the inflow from postal savings.
Funding costs for firms continue to be at extremely low levels.
In this financial environment, the lending attitudes of financial institutions and corporate financing
conditions remain easy as a whole. For the time being, attention should be paid to the effects of the
monetary easing measures taken by the Bank, while careful monitoring is required for the effects of
stock price developments and corporate profit conditions on the behavior of financial institutions and
the fund-raising conditions of firms.