Bank of Japan's October report of recent economic and financial
developments1
Bank of Japan, 15 October 2001
* * *
The Bank's View2
Adjustments in economic activity are becoming more severe, as the substantial decline in production
has a negative influence on employment and income conditions. In addition, the terrorist attacks in the
U.S. have further heightened uncertainty in Japan's economy.
With regard to final demand, net exports (real exports minus real imports) continue to decline,
reflecting not only a slowdown in overseas economies but also sluggish demand for IT-related goods.
Business fixed investment is also decreasing noticeably while exporting conditions continue to
deteriorate. Housing investment remains sluggish and public investment is declining. Meanwhile,
private consumption remains almost flat on the whole, although somewhat weak indicators are
increasing recently.
Industrial production continues to decline considerably, reflecting these developments in final demand
and also strong excessiveness in inventories of electronic parts and materials. The decrease in
corporate profits, particularly in manufacturing, has become evident and household income weakens
gradually.
Moreover, while such perception is becoming widespread that a further deceleration in overseas
economies is inevitable due to the terrorist attacks in the U.S., precautions against the business
outlook are intensifying among Japanese exporting firms.
Turning to the outlook, as for exporting conditions, although inventory adjustments in IT-related goods
worldwide are expected to continue for the time being, the prevailing view is that the adjustments will
be basically completed by around next spring. However, there exists a risk that the prolonged
downturn in U.S. private consumption affected by the terrorist attacks would induce another round of
adjustments in the Japanese economy, starting from the decline in exports such as of consumer
goods. Under these circumstances for exports, uncertainty toward the economy is growing further.
Meanwhile, with respect to domestic demand, business fixed investment is expected to follow a
downward trend judged not only from the continuous decline in corporate profits, but also from the
successive downward revisions of firms' investment plans in the IT-related sector. Private
consumption is likely to weaken gradually along with the deteriorating employment and income
conditions. Thus, the income-generating mechanism from corporate profits to employment and wages
is starting to work adversely, and at the same time government spending is projected to follow a
downward trend. Consequently, it may take quite a while for overall production activity to stop
declining, although the decrease in the production of IT-related goods may eventually come to an end.
Overall, adjustments in economic activity, starting from the decline in exports since the beginning of
this year, will surely affect domestic demand gradually. At the same time, concern that another
substantial decline in exports will exert downward pressure on the economy is growing. Moreover,
while the economy continues to be in a fragile state, continuous 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 declining mainly reflecting the softening of international
commodity prices. Domestic wholesale prices are also declining somewhat faster because the effects
from high crude oil prices and the depreciation of the yen in the past have dissipated, while prices of
electrical machinery and materials continue to decrease. Consumer prices are weakening owing
mainly to the decline in prices of imported products and their substitutes. Corporate service prices
continue to decrease.
As for the conditions surrounding price developments, with the prolonged adjustments in economic
activity, the balance between supply and demand in the domestic market will exert downward pressure
on prices gradually. 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 follow a gradual declining trend for the time being. Moreover, given the high
degree of uncertainty regarding future economic developments, the possibility that weak demand will
further intensify downward pressure on prices warrants careful monitoring.
In the financial market, the overnight call rate is moving around zero percent as the Bank of Japan
provided ample liquidity to the money market by aiming at maintaining the current account balances
held at the Bank at above 6 trillion yen due to the changes in the guideline for money market
operations decided at the Monetary Policy Meeting held on September 18.
Interest rates on term instruments are basically level on the whole. The Japan premium remains
negligible.
Yields on long-term government bonds are recently moving around 1.35-1.40 percent. As for the yield
spreads between private bonds (bank debentures and corporate bonds) and government bonds, while
spreads between bonds with relatively high credit ratings and government bonds remain mostly
unchanged, those between bonds with low credit ratings and government bonds seem to be
expanding somewhat.
Stock prices are recently starting to recover slightly.
In the foreign exchange market, the yen is currently being traded in the range of 120-122 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, the lending
attitudes of financial institutions as perceived by small firms are becoming slightly more cautious. In
corporate bonds and CP markets, the fund-raising conditions for firms continue to be generally
favorable.
On the other hand, credit demand in the private sector is declining faster mainly because firms are
decreasing their business fixed investment while continuously reducing their debts.
In view of this, private banks' lending is following a downward trend. The amount outstanding of
corporate bonds issued is growing at about 2 percent on a year-on-year basis. Meanwhile, the amount
outstanding of CP issued continues to be at a high level, significantly exceeding that of the previous
year, due to the favorable environment for issuing CP.
The growth rate of money stock (M2 + CDs) in September was higher than that of the previous month.
Funding costs for firms continue to be at extremely low levels.
Overall, the recent financial environment remains extremely easy: witness the permeation of easiness
in money market conditions, stably low interest rates, higher growth in monetary indicators, and the
generally favorable conditions in corporate bonds and CP markets. However, against the background
of deteriorating corporate earnings and the more cautious lending attitudes of financial institutions,
fund-raising conditions of small firms are apparently becoming more severe. Hence, the developments
in the behavior of financial institutions and corporate financing need closer monitoring.
In addition, it is necessary to carefully monitor the effects of the terrorist attacks in the U.S. and the
subsequent developments on global financial markets and economic activity.