Bank of Japan's September report of Recent Economic and Financial
BANK OF JAPAN COMMUNICATION, 11/9/98.
Developments
1
The Bank's View
Japan's economic conditions continue to deteriorate.
With respect to final demand, public investment seems to have bottomed out. Net
exports (exports minus imports) are increasing mainly due to a decline in imports. However,
business fixed investment has been decreasing significantly, and housing investment has declined
further. Private consumption has not yet shown a recovery despite the special income tax reduction.
Against this background of weak final demand, production has been reduced substantially. As a
result, some industries have shown improvements in inventory adjustments, but the level of
inventories is still high as a whole. With the decline in expenditure and production, corporate profits
continue to decrease, and the decline of employee income is accelerating somewhat. In addition, the
ratio of job offers to applications records a historically low level, and the unemployment rate
remains at a high level. As a whole, the employment and income conditions have deteriorated
further.
As the above indicates, there are continued negative interactions of production,
income, and expenditure. Given the current considerably low level of economic activities, the
economy is unlikely to transit immediately to a self-sustained recovery led by private demand,
although a further deterioration in the economy is expected to cease gradually from the effects of the
comprehensive economic stimulus package. Additionally, attention should be paid to possible
negative effects on the real economy from financial developments including the recent fall in stock
prices. In these circumstances, the cabinet approved a guideline on budget requests by ministries for
fiscal 1999. This guideline intends to stimulate the economy by allocating ¥4 trillion to the special
budgetary provision on the condition that the Fiscal Structural Reform Act is suspended. In addition,
the bills to rebuild the stability of the financial system are being deliberated at the Diet, and the
reduction exceeding ¥6 trillion in personal income taxes and corporate taxes is expected to be
discussed in detail. The materialization of these policies along with their effects on corporate and
household sentiment should be carefully monitored.
With regard to prices, wholesale prices are on a downtrend, and consumer prices are
lowering below the previous year's level. With respect to the outlook, the downward pressure from
domestic factors is unlikely to weaken considerably reflecting the already large output gap, despite
the expected effects of the comprehensive economic stimulus package. Hence, prices are likely to be
weak for some time.
In the financial markets, stock prices dropped considerably in late August and still
remain unstable, due to the heightened uncertainty over the problems with the financial system and
the worldwide stock market plunge triggered by Russia's financial crisis. Meanwhile, interest rate
spreads, such as the rate differential between Euro-yen deposits and treasury bills, the Japan
premium, and the yield differential between private and government bonds, expanded against the
background of intensified market concern toward credit risks of Japanese financial institutions.
Nevertheless, both long- and short-term interest rates declined slightly as a whole, which seemingly
indicates that some market participants anticipated additional monetary easing.
With respect to corporate finance, some firms are moving to resume securing
on-hand liquidity against the cautious lending stance of private banks, although credit demand for
real economic activities remains sluggish. Consequently, the issuance of corporate bonds and
commercial paper continues to increase, and the private bank lending, measured by annual percent
changes, has escaped further decline so far. In addition, the growth of money stock appears to hold
back its recent decelerating trend.
However, some firms, especially small and medium-sized ones, continue to face a
severe environment in terms of both funds availability and fund-raising costs. This influence on the
economy continues to warrant careful monitoring.