Bank of Japan's July report of recent economic and financial developments1
Bank of Japan, 16 July 2001
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The Bank's view2
Adjustments in economic activities are intensifying, as production is declining substantially reflecting a
fall in exports.
With regard to final demand, private consumption remains flat on the whole. Housing investment is
declining and public investment is also about to decrease since the implementation of the
supplementary budget for fiscal 2000 has peaked out. Net exports (real exports minus real imports)
continue to decrease, reflecting not only a slowdown in overseas economies but also sluggish demand
for IT-related goods. Business fixed investment has started to decrease while exporting conditions
continue to deteriorate.
Industrial production continues to decline sharply, reflecting such developments in final demand and a
further buildup of excess inventories of electronic parts and some materials. Corporate profits and
business sentiment are also worsening particularly in manufacturing. Income conditions of households
have not yet deteriorated, but the decline in production is starting to affect the household sector mainly
through the decrease in hours worked.
As for the outlook, public investment is expected to follow a declining trend. Net exports are likely to
continue decreasing for a while amid the deceleration in overseas economies and ongoing inventory
adjustments in IT-related goods worldwide. Judged from leading indicators and investment plans of
firms, business fixed investment is projected to follow a downward trend. In addition, inventory
adjustments in goods such as electronic parts and materials will continue for the time being. Industrial
production is, therefore, expected to follow a declining trend. In these circumstances, a decline in
corporate profits seems inevitable for the time being and thus household income is expected to
weaken gradually.
Overall, the adjustments, mainly in production, are likely to continue for some time. Among factors
affecting exports, it is generally thought that inventory adjustments in IT-related goods will have come
to an end by early fall and overseas economies, particularly the United States, will follow a gradual
recovery trend from around the end of this year. In this case, exports are expected to underpin the
economy once again. However, a prolonged deceleration of overseas economies could yield the risk
of economic adjustments spreading further. Also, attention should be paid to the risk of a negative
impact on the economy induced by developments in foreign and domestic capital markets via
corporate and household confidence.
With regard to prices, import prices are mostly unchanged. Domestic wholesale prices are weak
mainly due to the decrease in prices of electrical machinery. Consumer prices continue to be
somewhat weak owing to the decline in prices of imported products and their substitutes. Corporate
service prices continue to decrease.
As for the conditions surrounding price developments, the past yen depreciation is exerting upward
pressure on prices. However, with the ongoing adjustments in economic activities, the balance
between supply and demand in the domestic market is likely to exert downward pressure on prices.
Furthermore, in addition to the declining trend of machinery prices caused by technological
innovations, the decreases in the prices of goods and services reflecting deregulation and the
streamlining of distribution channels will continue to restrain price developments. Overall, prices are
expected to be weak for the time being. Moreover, given the high degree of uncertainty regarding
future economic developments, the possibility that weak demand will intensify downward pressure on
prices warrants careful monitoring.
In the financial market, the overnight call rate is basically moving around zero percent under the
guideline for money market operations to maintain the current-account balance at the Bank of Japan
at around 5 trillion yen.
Interest rates on term instruments are basically level on the whole. The Japan premium remains
negligible.
Yields on long-term government bonds rose after moving at around 1.15-1.2 percent until the end of
June and are recently moving around 1.3 percent. The yield spreads between private bonds (bank
debentures and corporate bonds) and government bonds are mostly unchanged or contracting
somewhat.
Stock prices are declining due mainly to the decrease in U.S. stocks.
In the foreign exchange market, the yen is depreciating against the U.S. dollar and is currently being
traded in the range of 124-126 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. However, there are some
signs indicating that the lending attitude of financial institutions perceived by small firms is becoming
slightly more cautious. Meanwhile, the fund-raising conditions of firms in the markets for such
instruments as corporate bonds and CP continue to improve owing to the decline in market interest
rates and the more active stance of investors to take credit risks.
On the other hand, credit demand of private firms continues to lack momentum as the level of
corporate expenditures such as business fixed investment remains below firms' cash flow. 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, the underlying tone of private banks' lending remains sluggish. Meanwhile, the growth
rate of amount outstanding of corporate bonds issued is recently rising slightly. The amount
outstanding of CP issued is well above that of the previous year and marking the highest level to date,
reflecting the favorable environment for issuing CP.
The growth rate of money stock + CDs) in June was higher than that of the previous month due
(M2
mainly to the inflow from postal savings.
Funding costs for firms are on a declining trend reflecting developments in market interest rates.
In this financial environment, the lending attitudes of financial institutions and corporate financing
conditions remain easy as a whole. For the time being, attention should be paid to the effects of the
monetary easing measures taken by the Bank, while careful monitoring is required for the effects of
stock price developments and corporate profit conditions on the behavior of financial institutions and
the fund-raising conditions of firms.