Bank of Japan's October report of
recent economic and financial developments1
Bank of Japan, Communication, 15 October 1999.
* * *
The Bank's View2
Japan's economy has stopped deteriorating, and exports and production are improving at present.
However, clear signs of a self-sustained recovery in private demand have not been observed yet.
With regard to final demand, business fixed investment has been on a downward trend. Recovery in
private consumption continues to be weak on the whole, reflecting the persistent severity in
employment and income conditions. Housing investment, which had been recovering, has recently
peaked out. Meanwhile, public works have been rising, and net exports (exports minus imports) have
continued to grow due to an increase in exports.
Reflecting such developments in final demand and continued progress in inventory adjustment,
industrial production is increasing. Additionally, corporate profits have started picking up. In this
situation, corporate sentiment has continued to improve. Such positive developments in corporate
profits and sentiment, however, have not necessarily stimulated business activities, because firms
strongly feel that they have excess capacity and employees and that they should reduce their debts to
restore financial soundness.
As for the outlook, improvements in the overall financial environment partly due to the monetary
easing by the Bank, along with a series of economic measures taken by the government, are expected
to continue underpinning the economy. Moreover, the positive impact on domestic production of the
recovery of overseas economies, especially of Asian economies, is likely to continue for some time.
By contrast, leading indicators suggest a high probability of a moderate decrease in housing
investment in the near future. The recent developments in public works orders indicate that public
investment is likely to stop increasing. In addition, under cautious sales plans, firms are expected to
continue corporate restructuring to improve their profitability. Although such restructuring is expected
to improve productivity, in the short run, it reduces fixed investment and also discourages household
expenditure through the resulting deterioration in employment and income conditions. Moreover, it
seems that the recent appreciation of the yen will have an adverse effect on corporate profits in the
near term. Under such circumstances, it is still difficult to expect an immediate self-sustained recovery
in private demand. Overall economic developments require careful monitoring in consideration of the
above points. It is also important to promote structural reform in order to assure the economy's
sustained growth in the medium term.
With regard to prices, import prices have recently fallen slightly due to the appreciation of the yen,
despite the rise in international commodity prices such as crude oil prices. Domestic wholesale prices
are levelling off due to the progress in inventory adjustment as well as an increase in prices of some
products closely related to international commodities, such as those of petroleum products. Consumer
prices continue to be unchanged. Corporate service prices are still falling, although the pace of the
decline is slowing. As regards the movements of overall prices in the future, they are likely to be flat,
as the rise in crude oil prices to date will continue to be passed on to prices of other products for a
while. However, substantial narrowing in the output gap led by a recovery in private demand is
unlikely for the time being, and wages continue to decline. Thus, downward pressure on prices is
expected to remain.
In the financial market, the overnight call rate has stayed at nearly zero, and financial institutions have
been confident about the availability of overnight funds. As for interest rates on term instruments,
short-term rates maturing before the year-end have been moving at a historically low level.
Meanwhile, rates maturing beyond the year-end are relatively high due to market participants' concern
over the Year 2000 problem.
The Japan premium has continued to be nearly zero for short-term transactions, but a small premium
has been observed for transactions maturing beyond the year-end.
Yields on long-term government bonds declined from late August to the level of around 1.6 percent.
They rose somewhat thereafter and have recently been moving between 1.7 and 1.8 percent. The yield
spread between government bonds and private bonds (bank debentures and corporate bonds) has been
stable and noticeably smaller than before.
Stock prices fell below the 17,000 yen level in late September against the background of the weak tone
in U.S. stock prices and the rapid appreciation of the yen, but subsequently rebounded reacting to the
recovery in U.S. stock prices and the restoration of stability in the foreign exchange market. The prices
are presently moving around 18,000 yen.
In the foreign exchange market, the yen surged against the U.S. dollar and reached the 103-104 yen
level in the middle of and late September, but then declined to the current level of 106-108 yen to the
dollar.
The amount outstanding of funds in the call money market has remained generally stable since the
middle of June. To date, this has not led to any difficulty in funds settlement, but close attention
should be paid to future market developments.
With regard to corporate finance, private banks have basically retained their cautious lending attitude.
However, constraint that had been caused by severe fund-raising conditions and insufficient capital
base has eased considerably. Under these circumstances, major banks have gradually become more
active than before in extending loans, while carefully evaluating the credit risks involved.
However, credit demand for economic activities such as business fixed investment remains weak. In
addition, some firms have been trying to reduce debts using their on hand liquidity. As a result, credit
demand in the private sector has continued to be weak, and thus private banks' lending has remained
sluggish. Meanwhile, issuance of corporate bonds and CP has recently been steady.
The year-to-year growth rate of money stock (M2+CDs) has declined to around 3.5 percent mainly due
to the weakness in credit demand in the private sector.
In this financial environment, credit conditions have eased somewhat.
The following continue to warrant careful monitoring: how actively investors will take risks; how far
private banks will ease their lending stance; and how these changes will affect economic activities.