Bank of Japan's monthly report of recent economic and financial developments1
Bank of Japan, Communication, 17/12/98.
The Bank's View2
The economic deterioration in Japan has moderated somewhat, mainly as a result of the increase
in public investment.
With respect to final demand, business fixed investment has been declining significantly, and
housing investment continues to be sluggish. Private consumption, as a whole, shows some
weakness. Meanwhile, net exports (exports minus imports) are basically on an upward trend, and
public investment has started to increase considerably. Reflecting this development of final
demand and some progress in inventory adjustments, especially in those of durable goods, the
decline in production has been slowing.
Corporate profits continue to worsen, and employment and household income conditions have
deteriorated as the ratio of job offers to applications has recorded a historical low and winter
bonuses are expected to decrease. Financial conditions are improving in some firms with the
effects of the policy measures taken by the government and the Bank. Nonetheless, firms
apparently cannot remove their anxiety about fund-raising conditions. Consequently, corporate
and household sentiment remains cautious, and a recovery has not been observed in private
demand.
With the implementation of the government's comprehensive economic stimulus package and
recently launched emergency economic measures, the economy is likely to be underpinned
mainly by public investment towards [= during?]the first half of fiscal 1999. Furthermore, the
Bank's monetary and financial measures and the government's measures to alleviate the credit
crunch are expected to take effect gradually. Nevertheless, an immediate self-sustained recovery
in private demand is hardly expected since corporate profits and household income are
deteriorating and the constraints from corporate finance are likely to persist for some time, owing
to cautious lending attitudes of private banks. Moreover, attention should be paid to the effects of
the appreciation of the yen since early autumn and the uncertainty in financial and economic
developments abroad. To lead Japan's economy into a steady recovery, it is important to prepare
an environment where firms and households can regain confidence in Japan's economic future
by, for instance, promptly restoring the stability of the financial system.
With regard to prices, reflecting the expansion in the output gap, wholesale prices are on a
downtrend, and corporate service prices are weakening. Consumer prices have increased slightly
above the previous year's level, owing to the rise in prices of perishables. Excluding this effect,
however, consumer prices basically continue to be weak. As for the outlook, the economic
deterioration is likely to moderate, mainly as a result of the increase in public investment.
Nonetheless, distinct narrowing in the output gap is hardly expected for the time being as private
demand remains sluggish. Furthermore, the continued decline in wages and the appreciation of
the yen since early autumn are likely to exert downward pressure on prices. Hence, the decline in
prices, especially in wholesale prices, may somewhat accelerate in the future.
Turning to the financial markets, Japanese banks are successfully raising foreign currency funds
necessary to cover a huge shortage at the year-end. Reflecting this, the Japan premium and
Euroyen rates have peaked out, and the market's anxiety, which had previously intensified, is
gradually settling down. In the meantime, market interest rates on instruments maturing after the
fiscal year-end (March 1999) are on an upward trend, suggesting continued concern of market
participants over liquidity risk.
Yields on long-term government bonds have rebounded since late November. Although stock
prices considerably recovered after hitting the recent bottom in October, they have recently
softened again. The yield spread (the government bond yield minus the expected earnings on
stocks) remains extremely small or negative, reflecting market participants' continued cautious
outlook on the future of the economy.
With regard to corporate finance, firms are further seeking to secure ample on-hand liquidity in
fear of more difficulties in raising funds, especially toward the end of this fiscal year when the
large-scale redemption of corporate bonds is scheduled. Meanwhile, private banks are continuing
their cautious lending stance.
In these circumstances, various policy measures seem to have prevented serious credit shrinkage:
the enhancement of [the ?]credit guarantee system[s ?] contributed to a recent increase in loans
to small and medium-sized firms; and the Bank announced the introduction of new measures, in
addition to the continued ample supply of funds, to facilitate firms' financing activities.
Fundamentally, however, firms are still under severe fund-raising conditions. How corporate
financing conditions towards the year-end and the fiscal year-end develop, and how such
developments influence business activities and the whole economy, continues to warrant careful
monitoring.