Bank of Japan presents its quarterly economic outlook for autumn 1997 BANK OF
JAPAN, QUARTERLY BULLETIN, November 1997 (advance issue).
Summary
1. Japan's economic growth has been decelerating since April, partly reflecting the
impact of the consumption tax hike. Corporate sentiment has also weakened somewhat. However, the
recovery trend in corporate profits, employment and income conditions has not been undermined,
supported by the rise in exports and business fixed investment.
Among final demand items, public-sector investment has been declining, and housing
investment has also dropped significantly, mainly reflecting the decline after the surge in demand prior to
the consumption tax hike. Personal consumption has continued to be sluggish on the whole, although the
impact of the consumption tax hike has gradually subsided. However, net exports and business fixed
investment have been increasing. In these circumstances, excessive inventories are seen in some
industries such as in consumer durables, and industrial production has stayed virtually unchanged.
Employment and income conditions have continued to improve, although the pace of recovery has
moderated somewhat.
Prices remained stable on the whole, excluding the effect of the consumption tax hike.
Domestic wholesale prices (adjusted for seasonal electricity rates) have been relatively weak, reflecting
easy supply and demand conditions for construction-related goods. The year-to-year decline in corporate
service prices has slowed steadily, and the year-to-year growth in consumer prices (nationwide,
excluding perishables) has been stable at around 0.5-0.6 per cent. Meanwhile, changes in land prices
varied by type, and have not stopped declining on the whole.
2. In the financial markets, the overnight call rate (uncollateralized) stayed at the
level slightly below the official discount rate of 0.5 per cent. The long-term government bond yield
temporarily rose to near 2.7 per cent at the end of May, but it followed a declining trend since then,
reflecting the uncertainty about future economic growth. It has been moving at around the record low
level of around 1.7 per cent since early October. Stock prices also moved at a low level of around
17,000 - 18,000. Meanwhile, the yen depreciated somewhat against the U.S. dollar as the contrast
between Japan's and U.S. economic growth gained more attention. The yen has recently moved at around
120 - 122 to the U.S. dollar.
Growth in bank lending continues to be lackluster. Fund-raising activities through capital
markets fell below the previous year's level. Growth in monetary aggregates in terms of M2 + CDs
year-to-year average outstanding has continued at around 3 per cent.
3. With respect to the outlook, public-sector investment is expected to continue
declining, judging from the government's budget. On the other hand, net exports are expected to follow
an increasing trend, reflecting firm overseas demand and the depreciation of the yen to date, although the
pace of increase will be slower than that recorded up to the second quarter.
According to the Bank of Japan's Tankan -- Short-Term Economic Survey of Enterprises
of September 1997, the increase in corporate profits overall is expected to be maintained, albeit at a
slower pace. While profits of small non-manufacturing firms are expected to decline owing to the decline
in demand in addition to structural factors, those of large manufacturing firms are projected to continue
on an increasing trend, largely supported by exports. In these circumstances, the pace of increase in
business fixed investment may slow down somewhat as investment in telecommunications is expected to
remain unchanged after surging in the previous fiscal year. However, given that stock accumulation is
not excessive and demand for information-related investment is strong, business fixed investment will
continue a steady increase.
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As for the household sector, the growth in bonus payments and overtime payments has
been slowing. This may suggest that the economic deceleration since spring 1997 has started to affect
household income. However, the significant deterioration of household confidence is unlikely to be
triggered by these developments, as the current employment conditions are very different from those of
around 1993 when the risk of severe employment adjustment was large. Also, the recent weaknesses in
personal consumption and housing investment partly reflect the temporary factors, such as the reaction to
the front-loading of demand before the consumption tax hike. The downward pressure from fiscal
policies is likely to weaken gradually in the near future. Therefore, once the impact of the consumption
tax hike subsides, an early recovery of household expenditure may translate into the positive cycle of
production, income and expenditure. Still, there are uncertainties about the recovery in personal
consumption, as consumer confidence is susceptible to psychological elements.
4. With respect to price developments, domestic wholesale prices are likely to
continue to be weak for the time being. This is because inventory adjustment pressures are being exerted,
and the downward pressure from electrical goods prices caused by technological innovation remains
strong, although the downward pressure coming from import prices has been subsiding. Meanwhile,
corporate service prices will stay virtually unchanged, and consumer prices are likely to continue a
similar moderate rise.
5. In sum, fiscal policies, including the consumption tax hike, continue to affect
Japan's economy, and the slowdown in domestic demand seems to have influenced corporate profits,
employment and income conditions gradually through a deceleration in production activity.
However, corporate profits and employees' income have maintained their growth, although at a
somewhat slower pace. Also, labor adjustment and capital stock adjustment pressures are not so large,
and the risk of deflation is negligible. In light of this, the basis for economic recovery has not been
undermined. If household expenditure picks up and inventory adjustment pressures subside steadily, the
economic recovery is likely to gather momentum again, albeit gradually. Given the cautious corporate
sentiments and the uncertainty about future developments in demand, it is essential to monitor closely
future economic developments, particularly the pace of recovery in household expenditure, and the
progress in inventory adjustment.