Bank of Japan's February review of monetary and economic trends in Japan
BANK OF JAPAN, MONTHLY ECONOMIC REVIEW, 18/2/97.
A moderate economic recovery continues in Japan as private demand shows
increasing firmness. With respect to final demand, public-sector investment has decreased while
net exports are on an increasing trend. Housing investment has remained at a high level and
business fixed investment is increasing steadily. While growth in personal consumption has
been moderate on the whole, passenger car sales, which have a strong influence on production,
have accelerated significantly. Meanwhile, inventories on the whole are at appropriate levels.
In these circumstances, industrial production has recently increased at a somewhat fast pace and
labor market conditions have continued to improve moderately. Meanwhile, prices have stopped
declining, and monetary aggregates continue to grow at 3.0 - 4.0 per cent.
With regard to personal consumption, sales at department stores and supermarkets
are improving moderately, albeit with some fluctuations. Outlays for travel have remained firm.
Growth in sales of electrical appliances has become somewhat moderate as the pace of
expansion in personal computers and cellular telephones decelerated. Passenger car sales have
recorded buoyant two-digit growth year-to-year for four consecutive months since October
1996.
Among leading indicators of business fixed investment, machinery orders are
increasing steadily on average, although they are expected to show a decline in the first quarter
of 1997 as a reaction to the large increase recorded in the fourth quarter of 1996 in both the
manufacturing and non-manufacturing sectors. Construction floor area has also continued to
pick up moderately.
With respect to housing investment, housing starts have remained strong
reflecting low interest rates and reasonable housing prices. They recorded a high
seasonally-adjusted annual rate of over 1.7 million starts in the fourth quarter of 1996, partly
reflecting the rise in orders ahead of the consumption tax rate hike.
Regarding public-sector investment, public works contracted showing
developments in orders have decreased significantly since autumn 1996 compared to the high
level recorded in the previous year which reflected the large economic stimulus package. As for
actual implementation of public works, with a time lag after orders, the seasonally adjusted level
of shipments of related goods has been decreasing since autumn 1996 after having increased
until the summer.
Real exports have recently shown an increasing trend as the effects of the yen's
depreciation since summer 1995 have gradually permeated. Meanwhile, the increase in real
imports has slowed, also reflecting the depreciation of the yen. As a result, the real trade surplus
turned to an increase in autumn 1996. The nominal current account surplus is also beginning to
rise, although the pace of increase is slower than that of the real trade surplus, partly because the
rise in oil prices is pushing up import volume.
Industrial production has increased significantly by an annual rate of over 10 per
cent quarter-to-quarter in the fourth quarter of 1996. This increase was caused by the rise in
final demand, particularly in demand conducive to production, such as passenger car sales,
machinery orders, and net exports, in addition to the completion of inventory adjustments.
Industrial production is expected to continue increasing significantly in January and February
1997, reflecting the rise in demand ahead of the consumption tax rate hike.
Labor market conditions have continued to improve moderately on the whole.
Although the unemployment rate remains at a high level and employment growth has been
moderate, overtime working hours have significantly exceeded the level of the previous year in
line with production growth, and the ratio of job offers to job applications has continued its rise.
With respect to price developments, domestic wholesale prices (adjusted for
seasonal electricity rates) have stopped declining, although downward pressures such as from
competition with imports and technological innovation in, e.g., electrical machinery, remain
strong. This development has been supported by the yen's depreciation to date, the rise in crude
oil prices and the moderate improvement in domestic supply and demand conditions. Corporate
service prices have declined, particularly in rents and leasing charges, but the year-to-year
decrease has become smaller. Consumer prices (nationwide, excluding perishables) have
exceeded the level of the previous year, as the decline in commodity prices has slowed against
the background of the yen' depreciation and the halt in the decline in domestic wholesale prices.
Growth in monetary aggregates, measured in terms of the year-to-year growth
rate of M2 + CDs average outstanding, has remained stable on the whole at 3.0 - 4.0 per cent.
Although lending by private financial institutions has been weak, that by public financial
institutions has been firm.
Regarding money market rates, the overnight call rate (uncollateralized) on the
whole has stayed somewhat below the official discount rate of 0.5 per cent. The 3-month CD
rate has moved at 0.50 - 0.55 per cent. Meanwhile, with regard to the market 's interest rate
expectations, 3-month Euro-yen futures are showing relatively minor movements after declining
at a brisk pace between summer and autumn 1996. In these circumstances, the long-term
government bond yield had been declining since summer 1996, and has recently moved at
around 2.4 per cent.
With respect to bank lending rates, the short-term prime lending rate has
remained at a record low level of 1.625 per cent since September 1995. The long-term prime
lending rate was lowered three times by a total of 0.8 percentage points since September 1996 in
response to the developments in the long-term interest rates, and has been moving at the record
low of 2.5 per cent since December. In these circumstances, short-term and long-term average
contracted interest rates on new loans and discounts have moved at around record low levels.
On the stock exchange, the Nikkei 225 stock average plummeted between the end
of 1996 and early 1997 reflecting market's uncertainties about Japan's economic outlook and
balance-sheet problems. It became stable in late January 1997 and has recently stayed around
¥18,000 - 19,000.
In the foreign exchange market, the yen depreciated moderately on the whole
against the U.S. dollar in 1996, but the pace of depreciation has accelerated since the end of
1996. The yen has recently moved at around ¥123 - 124 to the U.S. dollar. Meanwhile, the yen
has been relatively stable against the deutsche mark at around ¥73 - 74.