Bank of Japan's February report of recent economic and financial
developments1
Bank of Japan, 13 February 2001.
* * *
The Bank's view2
Japan's economy continues to recover gradually, but the pace is slowing due to decelerating export
growth.
With regard to final demand, business fixed investment is on an increasing trend. The recovery in
private consumption continues to be weak as a whole due to lack of notable improvements in
employment and income conditions, but there are somewhat positive signs in some indicators.
Housing investment is virtually unchanged. As for public investment, the pace of decline is slowing.
Meanwhile, net exports (real exports minus real imports) are starting to decrease reflecting a
slowdown in overseas economies such as the U.S. and East Asia.
Reflecting such developments in final demand, industrial production remains on a rising trend, but the
pace is slowing considerably. Inventories of some materials and electronics parts, for which demand
from overseas is declining significantly, have become somewhat excessive, but inventories as a whole
still remain at a low level. Meanwhile, corporate profits continue to improve. Income conditions of
households still remain severe but are not deteriorating, as employment conditions are on an
improving trend.
As for the outlook, public investment is expected to start increasing with the implementation of the
government's new economic stimulus package. In the corporate sector, firms still strongly feel that
they have excess capacity and that they should reduce their debts to restore financial soundness.
However, it is very likely that fixed investment in high-growth sectors, including those related to
information technology services, will increase as corporate profits continue to recover. Moreover, the
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 no significant change has
been observed in their efforts to reduce personnel expenses.
It seems to be inevitable that exports will decline for some time reflecting the slowing of economies
overseas. Imports are projected to continue increasing, particularly those of consumer goods, and
capital goods and parts. Hence, net exports are expected to decline. Mainly due to these
developments in exports, industrial production is expected to remain at around the current level for a
while.
Overall, it is likely that the economy will continue a gradual upward trend led mainly by business fixed
investment. In addition, the favorable financial environment, created partly by the Bank's continuation
of its easy monetary stance, and the government's new economic stimulus package are expected to
underpin the economy. However, attention should be paid to growing risks of downward pressures on
the economy induced by a possible further slowdown in overseas economies as well as by
developments in foreign and domestic capital markets.
With regard to prices, import prices are rising, mainly reflecting the depreciation of the yen. Domestic
wholesale prices are declining somewhat mainly due to the decrease in prices of electrical machinery.
Consumer prices continue to be somewhat weak owing to the decline in prices of other imported
products and their substitutes, despite the increase in prices of petroleum products. Corporate service
prices are still falling slowly.
As for the conditions surrounding price developments, the recent yen depreciation is exerting upward
pressures on prices. Moreover, the balance between supply and demand in the domestic market is
projected to be on a gradual improving trend, while an economic recovery is expected to continue at a
moderate pace. Recently, however, the pace of recovery seems to be slowing and crude oil prices,
which had been exerting upward pressures on prices, are falling. In addition to the declining trend of
machinery prices due to technological innovations, the decrease in prices of consumer goods arising
from the streamlining of distribution channels, and the reduction in communications fees aided by
deregulation will continue to exert downward pressures on prices. Overall, prices are expected to be
somewhat weak for the time being.
In the financial market, the overnight call rate is generally moving around 0.25 percent.
Interest rates on term instruments have been declining somewhat. The Japan premium remains
negligible.
Yields on long-term government bonds have declined to around 1.4-1.45 percent. The yield spreads
between private bonds (bank debentures and corporate bonds) and government bonds are mostly
unchanged or expanding somewhat.
Stock prices continue to be weak and are moving around the lowest level recorded since the
beginning of 2000.
In the foreign exchange market, the sharp depreciation of the yen since late December has come to a
pause. The yen is currently being traded in the range of 114-117 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. There seem to be no
significant changes in the fund-raising conditions of firms in the markets for such instruments as
corporate bonds and CP.
On the other hand, the improvement in economic activities has not stimulated corporate demand for
external funds, since firms' cash flow is at a high level in parallel with the recovery in profits. Moreover,
firms continue to reduce their 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, lending by private banks remains sluggish, declining at around 2 percent year-on-year.
Meanwhile, the amount outstanding of corporate bonds issued is slightly above the previous year's
level. The amount outstanding of CP issued continues to be at a high level.
Recently, the growth rate of money stock + CDs) is slightly increasing due to the inflow from postal
(M2
savings.
As for funding costs for firms, short-term funding rates basically remain flat but long-term funding rates
seem to be declining reflecting the developments in market interest rates.
In this financial environment, the lending attitude of financial institutions and corporate financing
conditions remain easy. However, the effects of the decline in stock prices on the fund-raising
conditions of firms need to be carefully monitored.