Bank of Japan's September report of recent economic and financial
developments1
Bank of Japan, 16 September 2003.
* * *
The Bank's view2
Economic activity still continues to be virtually flat as a whole, although signs of improvement have
been observed in such areas as the environment for exports.
With regard to final demand, business fixed investment is recovering gradually. Meanwhile, private
consumption continues to be weak, housing investment remains sluggish, and public investment is
declining. Net exports are virtually flat.
Industrial production continues to be basically level in response to these developments in final
demand, and corporate profits are on a moderate uptrend. As for the employment situation, although
the number of regular employees continues to decline, the total number of employees including both
regular and non-regular employees has stopped falling. The pace of decline in wages has also
slowed, and thus the decline in household income is gradually coming to a halt. However, the
unemployment rate continues to be high, and hence the employment and income situation of
households overall still remains severe.
Turning to the economic outlook, with respect to overseas economies, the likelihood is gradually
increasing that the growth rate of the U.S. economy will accelerate and that the East Asian economies
as a whole will resume a growth trend. Hence, exports and industrial production are likely to turn up
gradually.
With respect to domestic demand, public investment is projected to follow a declining trend, and
private consumption is likely to remain weak for some time since the employment and income situation
is unlikely to improve markedly. Meanwhile, the recovery trend in business fixed investment is
expected to become clearer in the period ahead, mainly in large manufacturing firms, whose
investment has been thus far significantly restrained despite the recovery in their profits. However, as
long as the pace of increase in exports and production continues to be gradual, the recovery in
business fixed investment is likely to remain moderate.
Overall, with the recovery in overseas economies, the uptrend in exports and production will resume
gradually, which in turn will initiate the momentum for an economic recovery in Japan. However, a
selfsustaining recovery in domestic demand is unlikely to gain momentum for some time due to persisting
downward pressures from structural adjustments, such as firms' reduction of excess debt and labor
costs. In addition, as for the outlook for the environment for exports, there still remains uncertainty
overall, as the employment situation in the United States continues to be sluggish and the pace of
recovery in some East Asian economies such as South Korea is slow. On the domestic side,
continued attention should be paid to the developments in financial markets such as the volatile
movements in long-term interest rates.
On the price front, import prices have recently stopped declining, reflecting the uptrend in international
commodity prices, especially crude oil prices. Under these circumstances, domestic corporate goods
prices are more or less flat, which is also partly due to the rise in tobacco tax. Meanwhile, corporate
services prices continue a year-on-year decrease of slightly over 1 percent. Consumer prices also
continue to decline, but the year-on-year rate of decrease has diminished to 0.2 percent due to special
factors, such as the rise in medical treatment costs in April in line with the reform of the medical
insurance system and the rise in tobacco tax in July.
Looking at the conditions influencing price developments, the outlook for import prices is unclear at
present because it largely depends on developments in the foreign exchange rate. Turning to the
domestic side, the basic conditions surrounding prices, such as the supply-demand balance in the
macroeconomy, technological innovations, streamlining of distribution channels, and pricing strategies
of firms, are unlikely to change significantly for the time being. Under these circumstances, domestic
corporate goods prices are likely to remain more or less flat for the time being. Consumer prices are
basically projected to continue falling at the current moderate pace on a year-on-year basis, although
there are possibilities that the rate of decline may temporarily diminish further depending on future
special factors.
As for the financial environment, the outstanding balance of current accounts at the Bank of Japan is
moving at the 29-30 trillion yen level, as the Bank has been providing ample liquidity. Under these
circumstances, the overnight call rate continues to move at around zero percent. Interest rates on term
instruments remain steady. Meanwhile, interest rates on Euroyen futures are recently declining
gradually after rising noticeably from late August.
Yields on long-term government bonds rose rapidly reflecting an improved outlook for Japan's
economy, and are recently moving in the range of 1.4-1.6 percent. Meanwhile, yield spreads between
private bonds (bank bonds and corporate bonds) and government bonds are widening slightly after the
rebound in long-term interest rates.
Stock prices have been rising sharply as foreign investors continue to invest in Japanese stocks. The
Nikkei 225 Stock Average is recently moving at around 10,500 yen.
In the foreign exchange market, the yen appreciated as foreign investors continued to invest in
Japanese stocks. The yen is currently traded in the range of 116-118 yen to the U.S. dollar.
With regard to corporate finance, private banks remain cautious in extending loans to firms with high
credit risks, while they continue to be more active in extending loans to blue-chip companies. Their
lending attitudes seem to be becoming slightly more accommodative in areas such as terms and
conditions for lending. Meanwhile, the lending attitudes of financial institutions as perceived by firms in
general are improving somewhat, although those perceived by small firms remain severe. In the
corporate bond and CP markets, the issuance spreads remain steady and the favorable issuing
environment is virtually unchanged on the whole, especially for firms with high credit ratings, although
some firms seem to be taking a wait-and-see stance in the corporate bond issuance market in view of
the rise in long-term interest rates.
Credit demand in the private sector continues to follow a downtrend mainly because firms' cash flow
remains above business fixed investment and firms are continuously reducing their debts.
Amid these developments, private banks' lending continues to decline at around 2 percent on a
year-on-year basis. The amount outstanding of corporate bonds issued is around the previous year's
level.
Meanwhile, according to business surveys, financial positions of firms in general are improving slightly,
although those of small firms remain severe.
The year-on-year growth rate of the monetary base continues to be around 20 percent. The
year-onyear growth rate of the money stock rose slightly and is at around 2 percent.
Funding costs for firms continue to be at extremely low levels on the whole.
Against the above background, the financial developments are summarized as follows. Money market
conditions continue to be extremely easy. Meanwhile, long-term interest rates and stock prices are
rising. Growth rates of the money stock and the monetary base relative to economic activity remain
high. In corporate finance, the favorable issuing environment of corporate bonds and CP is virtually
unchanged on the whole, especially for firms with low credit risks. However, there has been no
significant change in the severity of fund-raising environment for firms, particularly with firms with high
credit risks. Developments in the financial and capital markets, the behavior of financial institutions,
and the situation of corporate finance continue to require close monitoring.