Bank of Japan's January report of
recent economic and financial developments1
Bank of Japan, Communication, 19 January 2000.
* * *
The Bank's View2
Japan's economy, which had stopped deteriorating, has recently started to improve, with exports and
production increasing. The economic environment surrounding private demand is gradually
improving, as seen in the continuing increase in corporate profits. However, clear signs of a
selfsustained recovery in private demand have not been observed yet.
With regard to final demand, housing investment has recently peaked out, and public investment
seems to have stopped rising. Recovery in private consumption continues to be weak through lack of
notable improvements in employment and income conditions. Business fixed investment, which had
been on a downward trend, shows signs of leveling off. Meanwhile, net exports (real exports minus
real imports) continue to follow an upward trend, despite monthly fluctuations, due to an upturn in
overseas economies.
Reflecting such developments in final demand and progress in inventory adjustment, industrial
production continues to rise and an increase in corporate profits is becoming distinct. In this situation,
corporate sentiment continues to improve. Regarding the employment condition, there are some
indicators that suggest a slowdown of decrease in the number of employees. The positive
developments in corporate profits and sentiment, however, have not necessarily stimulated business
activities, because firms still strongly feel that they have excess capacity and employees and that they
should reduce their debts to restore financial soundness. In addition, efforts by firms to reduce
personnel expenses have prolonged the severity of households' income conditions.
As for the outlook, improvements in the overall financial environment partly due to the monetary
easing by the Bank, along with a series of economic measures taken by the government, are expected
to continue underpinning the economy. Moreover, the positive impact on domestic production of the
recovery of overseas economies, especially of Asian economies, is likely to continue for some time
and have favorable effects on corporate profits and then on household income. By contrast, it is highly
probable that housing investment will remain flat for the time being. In addition, firms are expected to
maintain a cautious stance toward business fixed investment based on their modest prospects for sales,
although corporate restructuring is improving profitability to some extent. Moreover, it seems that the
appreciation of the yen since the summer of 1999 will have an adverse effect on corporate profits in
the near term. In these circumstances, future economic developments still require careful monitoring in
spite of the gradual recovery in the environment for private demand. Furthermore, it is important to
promote structural reform in order to facilitate a recovery in private demand.
With regard to prices, import prices are declining somewhat due to the appreciation of the yen.
Domestic wholesale prices, notwithstanding the fall in prices of electric machinery, are flat mainly due
to the rise in prices of petroleum and chemical products reflecting an increase in crude oil prices.
Consumer prices remain unchanged fundamentally. Corporate service prices are still falling slowly. As
for the outlook, overall prices are likely to be flat for the time being despite the continued fall expected
in prices of some machinery. This is because the supply-demand balance is improving gradually, as
shown in the decline in inventories, and because the rise in crude oil prices to date will continue to be
passed on to prices of other products for a while. However, attention should still be paid to the
downward pressure on prices, as clear signs of a self-sustained recovery in private demand have not
yet been observed and wages continue to fall.
The financial markets have been generally stable reflecting ample funds provision by the Bank of
Japan, despite the surge in demand for liquidity including seasonal demand for year-end funds and
precautionary demand in view of the Year 2000 problem. No significant disruptions have resulted
from the millennium date change in financial transactions.
The overnight call rate has stayed at nearly zero, and financial institutions have been confident about
the availability of overnight funds. The amount outstanding of funds in the call money market has
increased slightly.
Interest rates on term instruments rose toward the end of 1999 due to market participants' concerns
about the Year 2000 problem, but declined around the turn of the year as these concerns were
dispelled. The Japan premium remains negligible.
Yields on long-term government bonds generally followed a downward trend from late November
throughout December 1999, but then rebounded somewhat and are presently ranging between
1.751.80 percent. The yield spread between private bonds (bank debentures and corporate bonds) and
government bonds continues narrowing, primarily that between private bonds with relatively low
credit ratings and government bonds.
Stock prices, after exceeding 19,000 yen at the beginning of 2000, weakened to around 18,000-18,500
yen following the correction in the U.S. stock market. Subsequently, they recovered reacting to the
rebound in U.S. stocks and have returned to the level of above 19,000 yen.
In the foreign exchange market, the yen once appreciated to the 101-102 yen level against the U.S.
dollar at the beginning of the year, but then depreciated and is currently being traded in the range of
105-107 yen.
With regard to corporate finance, private banks have basically retained their cautious lending attitude.
However, constraint that had been caused by severe fund-raising conditions and insufficient capital
base has eased considerably. Under these circumstances, major banks are gradually becoming more
active in extending loans, while carefully evaluating the credit risks involved.
However, credit demand for economic activities such as business fixed investment remains weak. In
addition, firms continue to reduce debts as part of their balance-sheet restructuring measures. As a
result, credit demand in the private sector has continued to be basically stagnant, and thus private
banks' lending has remained sluggish. Issuance of corporate bonds and CP has been steady at present.
The growth in money stock (M2+CDs) has slowed somewhat reflecting the stagnant private credit
demand.
In this financial environment, the financial position of firms is easing, and the lending attitude of
financial institutions as perceived by firms is becoming less severe. It continues to warrant careful
monitoring how these favorable developments in corporate financing environment will affect
economic activities.