Bank of Japan's February report of
recent economic and financial developments1
Bank of Japan, Communication, 15 February 2000.
* * *
The Bank's View2
Japan's economy has recently started to improve. The economic environment surrounding private
demand is gradually improving, as seen in the continuing increase in corporate profits. However, clear
signs of a self-sustained recovery in private demand have not been observed yet.
With regard to final demand, housing investment has peaked out and started to decline slowly, and
public investment seems to be decreasing moderately. Recovery in private consumption continues to
be weak with the decrease in income, particularly in winter bonuses. Business fixed investment, which
had been on a downward trend, is starting to level 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, the decrease in the
number of employees is gradually slowing. However, the improvements in corporate profits and
sentiment have not stimulated business activities of many firms, because these 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 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 continue to decline slowly, and public investment is expected to follow a moderately
downward trend for some time. In the corporate sector, restructuring is gradually improving
profitability to some extent and some firms in high-growth sectors are inclining toward increasing
capital spending. Many firms, however, are very likely to maintain a cautious stance toward fixed
investment based on their modest prospects for sales. 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 rising somewhat due to the increase in international
commodity prices such as crude oil prices, along with the recent depreciation 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.
Turning to the financial markets, the influence on the money market of concerns related to the Year
2000 problem has almost disappeared.
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
been basically unchanged.
Interest rates on term instruments have generally been stable at the level as low as that prior to the
emergence of concerns related to the Year 2000 problem. The Japan premium remains negligible.
Yields on long-term government bonds declined and, in late January, reached around
1.60-1.65 percent. But then they rebounded in reaction to the depreciation of the yen and the
developments in the stock market, and are presently around 1.85 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 have been on a rising trend since mid-January against the background of the depreciation
of the yen, and are currently moving around 19,500-20,000 yen.
In the foreign exchange market, the trend has been toward a weaker yen against the U.S. dollar, and
the yen is being traded in the range of 107-110 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 sluggish.
The growth in money stock (M2+CDs) continues to slow 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.