Bank of Japan's August report of
recent economic and financial developments1
Bank of Japan, Communication, 15 August 2000.
* * *
The Bank's view2
Japan's economy is recovering gradually, with corporate profits and business fixed investment
continuing to increase.
With regard to exogenous demand, net exports (real exports minus real imports) continue to follow a
moderate upward trend due to steady developments in overseas economies, and public investment
remains at a high level reflecting the progress in the implementation of the supplementary budget for
fiscal 1999. As regards domestic private demand, business fixed investment is increasing. The
recovery in private consumption continues to be weak as a whole through lack of notable
improvements in employment and income conditions, although there are somewhat positive signs in
some indicators. Housing investment is mostly unchanged.
Reflecting such developments in final demand, industrial production is increasing. Corporate profits
and sentiment continue to improve, and the number of firms that take positive action, such as
increasing the amount of fixed investment, is increasing, especially in high-growth sectors. Income
conditions of households still remain severe, but regular and overtime payments as well as new job
offers continue to increase in line with the recovery in corporate activities, and compensation of
employees has stopped decreasing.
As for the outlook, public investment is likely to start decreasing in the near future, but net exports are
expected to continue increasing gradually, reflecting the expansion in overseas economies. In the
corporate sector, firms still strongly feel that they have excess equipment and that they should reduce
their debts to restore financial soundness. However, it is very likely that fixed investment in
highgrowth sectors, including those related with information technology services, will increase as
corporate profits continue to recover. Moreover, an improvement in corporate profits will increase
household income and this in turn is expected to boost private consumption. However, the pace of
recovery in household income will be modest for the time being, since firms' perceptions of excess
employment still persist, and thus significant changes have not been observed in their efforts to reduce
personnel expenses. Overall, the economy is likely to recover gradually, led mainly by business fixed
investment, unless there are major adverse external shocks. In addition, the favorable financial
environment created partly by the Bank's sustaining easy monetary stance is expected to continue
underpinning the economy.
With regard to prices, import prices are rising, reflecting an increase in international commodity prices
such as crude oil prices since April. Domestic wholesale prices, notwithstanding the rise in prices of
petroleum products reflecting the increase in crude oil prices, are mostly unchanged mainly due to the
decrease in prices of electric machinery. Meanwhile, consumer prices continue to be somewhat weak
owing to the slight decrease in the prices of private-sector services and the decline in prices of
imported products reflecting the past appreciation of the yen. Corporate service prices are still falling
slowly.
As for the outlook on prices, downward pressure on prices stemming from weak demand is declining
significantly while an economic recovery is expected to continue moderately. Upward pressure on
prices is likely to arise temporarily from the increase in crude oil prices. On the other hand, in addition
to the declining trend of machinery prices due to technological innovations, the decline in prices of
consumer goods arising from the past appreciation of the yen and the streamlining of distribution
channels will exert downward pressure on prices. Thus, prices overall are expected to be stable or
weak somewhat.
In the financial market, the overnight call rate has generally stayed near zero, and financial institutions
have been confident about the availability of overnight funds. The amount of funds outstanding in the
call money market has decreased slightly.
Interest rates on term instruments once declined from mid-July, but have recently increased again
reflecting the change in expectations that the zero interest rate policy would be terminated. The Japan
premium remains negligible.
Yields on long-term government bonds recently increased somewhat, and has been around 1.75
percent. The yield spread between private bonds (bank debentures and corporate bonds) and
government bonds remains mostly unchanged as a whole.
Stock prices fell from mid-July mainly due to the filing of reconstruction proceedings by a major
retailer and the decline in U.S. stock prices.
In the foreign exchange market, the yen fell moderately towards the end of July and the yen-dollar
exchange rate temporarily rose to around 110 yen. The yen is currently being traded in the range of
107-109 yen to the U.S. dollar.
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. Given this, major banks continue to be more active in extending loans,
while carefully evaluating the credit risks involved.
On the other hand, the improvement in economic activities has not stimulated corporate demand for
external funds, since firms' cash flow is increasing in parallel with a recovery in profits. Moreover,
firms continue to reduce debts as part of their balance-sheet restructuring measures. As a result, credit
demand in the private sector has continued to be basically stagnant.
In view of this, the underlying tone of private banks' lending remains sluggish. Issuance of corporate
bonds and CPs has been steady.
Money stock + CDs) grew faster in July compared with the previous month on a year-on-year
(M2
basis.
In this financial environment, the lending attitude of financial institutions is perceived by firms as less
severe, and corporate financing conditions are easing.