Bank of Japan's December Report of Recent Economic
and Financial Developments1
Bank of Japan, Communication, 18 December 2000.
* * *
The Bank's View2
Japan's economy continues to recover gradually, albeit at a somewhat slower pace due to decelerating
export growth.
With regard to exogenous demand, public investment is decreasing gradually since the implementation
of the supplementary budget for fiscal 1999 has peaked out. Net exports (real exports minus real
imports), which had been increasing, are starting to level off as inventories of some raw materials and
electronics parts became somewhat excessive in East Asian economies. As regards domestic private
demand, business fixed investment is on an increasing trend. 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
declining slightly.
Reflecting such developments in final demand, industrial production remains on a rising trend
although the pace is somewhat slowing. Corporate profits continue to improve, and the number of
firms that take positive action, such as increasing the amount of fixed investment, is rising, 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 expected to maintain the current level for the time being, but
is likely to start increasing again in the future along with the implementation of the new economic
stimulus package by the government. While the U.S. economy is decelerating gradually, the expansion
in overseas economies is projected to continue, albeit at a slower pace. In these circumstances, exports
are likely to remain level for the time being mainly due to inventory adjustments in East Asian
economies. Meanwhile, imports are projected to continue increasing, particularly for those of
consumer goods, and capital goods and parts. Therefore, net exports will decline slightly for a while.
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
high-growth 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.
Industrial production is expected to remain on a rising trend, although the pace of increase may slow
down further temporarily.
Overall, the economy is likely to follow a gradual upward trend led mainly by business fixed
investment, while the developments in overseas economies as well as in foreign and domestic capital
markets, along with their effects on the economy, need to be carefully monitored. In addition, the
favorable financial environment created partly by the Bank's sustaining easy monetary stance and the
new economic stimulus package by the government are expected to underpin the economy.
With regard to prices, import prices are rising, reflecting an increase in international commodity prices
such as crude oil prices. Domestic wholesale prices, notwithstanding the rise in prices of petroleum
products reflecting the increase in crude oil 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, although prices of petroleum products
increased. Corporate service prices are still falling slowly.
As for the condition surrounding price developments, 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 moderately. On the other hand, semiconductor prices are declining reflecting
softer international semiconductor prices, and crude oil prices, which had been exerting upward
pressure on prices, are dropping recently. 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 will exert downward pressure on prices. Overall, prices are expected to be
somewhat weak for the time being.
In the financial market, the overnight call rate is moving around 0.25 percent.
As for interest rates on term instruments, Euro-yen transactions, TB and FB rates maturing beyond the
year-end are rising somewhat. The Japan premium remains negligible.
Yields on long-term government bonds have been on a downward trend since mid-October, having
decreased to around 1.55 percent temporarily, and are recently moving around 1.65 percent. The yield
spreads between private bonds (bank debentures and corporate bonds) and government bonds are
mostly unchanged or decreasing somewhat.
Stock prices continue to be weak, having recorded this year's lowest level towards the end of
November.
In the foreign exchange market, the yen has been depreciating from the beginning of November, and is
currently being traded in the range of 111-113 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.
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 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, the underlying tone of private banks' lending remains sluggish, although the expansion
in the year-to-year decline is ceasing. Meanwhile, the amount outstanding of corporate bonds issued is
slightly above the previous year's level. Issuance of CPs is increasing towards the year-end.
Money stock + CDs) continues to grow at around 2 percent on a year-on-year basis.
(M2
As for the funding costs for firms, the short-term funding rates basically remain flat but the long-term
funding rates are declining slightly reflecting the decrease in market interest rates.
In this financial environment, the lending attitude of financial institutions and corporate financing
conditions remain easy.