Bank of Japan's October report of recent economic
and financial developments1
Bank of Japan, Communication, 16 October 2000.
* * *
The Bank's view2
Japan's economy is recovering gradually, with corporate profits and business fixed investment
continuing to increase.
With regard to exogenous demand, public investment is starting to decrease since the implementation
of the supplementary budget for fiscal 1999 has peaked out. Net exports (real exports minus real
imports) continue to follow a moderate upward trend due to steady developments in overseas
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 mostly unchanged.
Reflecting such developments in final demand, industrial production is increasing. Corporate profits
and sentiment continue to improve, and the number of firms that take positive action, such as
increasing the amount of fixed investment, is increasing, 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 decrease. While the expansion in overseas
economies is likely to continue, the increase in exports is likely to slow down as restocking activity in
Asian economies has peaked out. Meanwhile, imports are projected to continue increasing, particularly
for those of information-related goods. Therefore, real exports will level off 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
highgrowth 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. Overall, the economy is likely to recover gradually led mainly by business fixed
investment, while the developments in crude oil prices as well as foreign and domestic capital
markets, along with their effects on the economy, need careful monitoring. In addition, the favorable
financial environment created partly by the Bank's sustaining easy monetary stance is expected to
continue underpinning the economy.
With regard to prices, import prices are rising, reflecting an increase in international commodity prices
such as crude oil prices since April. Domestic wholesale prices, notwithstanding the rise in prices of
petroleum products reflecting the increase in crude oil prices, are mostly unchanged mainly due to the
decrease in prices of electric machinery. Meanwhile, consumer prices continue to be somewhat weak
owing to the decline in prices of imported products reflecting the past appreciation of the yen,
although prices of petroleum products and electricity increased from the rise in crude oil prices.
Corporate service prices are still falling slowly.
As for the outlook on prices, downward pressure on prices stemming from weak demand is declining
significantly while an economic recovery is expected to continue moderately. Upward pressure on
prices is likely to arise temporarily from the increase in crude oil prices. On the other hand, in addition
to the declining trend of machinery prices due to technological innovations, the decline in prices of
consumer goods arising from the past appreciation of the yen and the streamlining of distribution
channels will exert downward pressure on prices. Thus, prices overall are expected to be stable or
weak somewhat.
In the financial market, the overnight call rate is generally moving around 0.25%. The amount of
funds outstanding in the call money market has increased slightly.
As for interest rates on term instruments, those on contracts maturing beyond the year-end have risen
somewhat. The Japan premium remains negligible.
Yields on long-term government bonds are generally moving in the range of 1.8-1.9%. The yield
spread between private bonds (bank debentures and corporate bonds) and government bonds remains
mostly unchanged as a whole.
Stock prices dropped from early October and are recently moving around the lowest level since the
beginning of this year.
In the foreign exchange market, the yen depreciated gradually from the end of September and the
yen-dollar exchange rate temporarily rose to ¥109-110. The yen is currently being traded in the range
of ¥107-109 to the US 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. Recently, however, the
expansion in the year-to-year decline seems to be ceasing. Issuance of corporate bonds and CPs has
been steady.
Money stock (M2 + CDs) grew faster in September compared with the previous month on a
year-onyear basis.
Recently, funding costs for firms are somewhat increasing, due to the rise in money market rates after
the termination of the zero interest rate policy.
In this financial environment, there seem to be no substantial changes in the lending attitude of
financial institutions and easing of corporate financing conditions.