Bank of Japan's March report of recent economic and financial developments1
Bank of Japan, Communication, 16 March 1999.
The Bank's View2
Japan's economy, at present, appears to have stopped deteriorating. With the increase in
public investment underpinning final demand, inventory adjustment has made further progress
and production has stopped decreasing.
With regard to final demand, business fixed investment has been declining significantly.
Recovery in private consumption continues to be weak on the whole, although partial
improvement in sales of goods has been observed. Housing investment remains at a low level
but has obviously bottomed out. Net exports (exports minus imports) are leveling off, and
public investment is growing considerably. Reflecting this development of final demand and
further progress in inventory adjustment, industrial production has stopped decreasing.
However, corporate profits have been declining, and employment and household income
conditions continue to deteriorate. Although conditions in corporate finance are improving,
firms apparently cannot remove their concern about the availability of funds in the future.
Consequently, corporate and household sentiment remains cautious.
As for the outlook, with the progress in inventory adjustment gradually paving the way for a
recovery in production, the government's economic measures and the monetary easing by the
Bank would underpin the economy. In addition, measures to restore the stability of the
Japanese financial system - especially the injection of public funds into banks - are expected
to exert positive effects on the economy gradually. With respect to corporate activities,
however, large firms in particular appear to take steps to full-scale restructuring over fiscal
1999, facing the continued decline in profits and the remaining concern about their financing.
In the short run, such corporate restructuring may reduce fixed investment and discourage
household expenditure through the resulting deterioration in employment and income
conditions. Under such circumstances, it is still difficult to expect an immediate,
selfsustained recovery in private demand. Overall economic developments require careful
monitoring in consideration of the above points.
With regard to prices, reflecting the large output gap, domestic wholesale prices are on a
downtrend, and corporate service prices are weakening. Consumer prices basically remain
weak. In relation to price developments in the future, distinct narrowing in the output gap is
unlikely for the time being even though the economy appears to have stopped deteriorating.
Furthermore, the decline in wages and the appreciation of the yen since autumn 1998 are
likely to continue exerting downward pressure on prices. Hence, prices are expected to remain
on a downtrend.
In the financial markets, the additional monetary easing by the Bank on February 12 has
lowered interest rates both on overnight call money and term instruments. In addition, the
markets' anxiety about liquidity and credit risks of Japanese banks seems to have subsided -
as reflected in a rapid contraction in the Japan premium - partly due to the progress in
preparation for public funds injection.
Meanwhile, the amount outstanding of funds in the call money market has decreased, partly
because some institutional investors have shifted a part of their funds from the market to
ordinary deposits. The shrinkage of the market has not led to any difficulty in funds
settlement. However, close attention should be paid to developments in the flow of funds as
unexpected changes may occur.
Long-term interest rates have, amid nervous market sentiment, declined following the fall in
short-term rates. Stock prices have turned to be firm against the background of the recent
depreciation of the yen and the rise in U.S. stock prices.
With regard to corporate finance, credit demand for economic activities such as fixed
investment remains weak. Firms' moves to increase their on-hand liquidity in the face of
difficult fund-raising conditions are settling down. Meanwhile, private banks have basically
retained their cautious lending stance, facing the worsening performance of borrower
companies. However, severity in their fund-raising conditions has been alleviated, and their
insufficient capital base is about to be increased. Under these circumstances, banks continue
to actively utilize the credit guarantee system.
As a result, the previously tightened credit conditions are easing somewhat. Nevertheless, the
market is still cautious of credit risk, and thus firms with relatively low credit ratings seem to
remain under severe fund-raising conditions.
The situation continues to warrant careful monitoring, particularly with regard to how
corporate finance develops toward the turn of the fiscal year.