Bank of Japan's November review of monetary and economic trends in
Japan BANK OF JAPAN, COMMUNICATION, 26/11/97.
Japan's economic growth is decelerating further. Although corporate profits,
employment and income conditions continue to improve moderately, weak household
expenditures since April have gradually begun to affect production, and corporate sentiment is
also weakening.
With respect to final demand, public-sector investment has been decreasing, and
housing investment has also dropped significantly. Personal consumption has continued to be
weak on the whole, although the impact of the consumption tax hike has gradually begun to
subside. On the other hand, net exports have continued to increase and business fixed investment
has been rising moderately against the background of the increase in corporate profits. Excessive
inventories are seen in some industries. Owing to weak final demand and inventory adjustments,
industrial production has recently declined somewhat. The pace of improvement in employment
and income conditions has slowed somewhat. Prices have remained stable on the whole, with the
exception of wholesale prices which have declined somewhat. The growth of monetary
aggregates has recently slowed.
Personal consumption has continued to be weak on the whole. Outlays for travel
have been increasing moderately, and there are some signs in the sales of goods which suggest
that the impact of the consumption tax hike has gradually begun to subside. However, sales at
department stores and supermarkets have been below the previous year's level, while passenger
car sales have fallen below the level recorded in the second half of fiscal 1996 when sales
surged, and have not even recovered the levels recorded before then.
Among leading indicators of business fixed investment, machinery orders have
continued on an increasing trend since early 1997 after having surged in the second half of 1996.
Recently, however, orders from non-manufacturing firms have been weak. Construction floor
area has followed a moderate recovery trend, albeit with some fluctuations.
With respect to housing investment, housing starts in terms of the
seasonally-adjusted annual rate declined in July to 1.24 million, the lowest level since September
1985, following the surge in demand in the second half of 1996 ahead of the consumption tax
hike. Housing starts have since remained weak at around 1.3 - 1.35 million.
Regarding public-sector investment, the amount of public works contracted has
followed a decreasing trend reflecting the restrained budget for fiscal 1997.
Against the background of steady overseas demand and the yen's depreciation to
date, real exports remained high in the third quarter 1997, although they decreased somewhat
from the second quarter when exports showed a significant rise. Real exports rose again in
October. Real imports, on the other hand, have remained virtually unchanged on average. As a
result, the real trade surplus has been increasing with some fluctuations. Reflecting these
developments in exports and imports, the nominal current-account surplus has also been
expanding significantly since April 1997.
Industrial production has recently been somewhat weak. Production in the third
quarter 1997 remained virtually unchanged on the whole. This is because production has been
cut back mainly in the industries with excessive inventories, such as consumer durables and
construction-related goods, although production of electrical machinery continued to increase,
reflecting steady exports. Production in October and November is expected to decrease as a
result of inventory adjustment pressures.
With respect to labor market conditions, the unemployment rate has remained at a
high level, and the ratio of job offers to job applications has recently eased somewhat. Growth in
overtime working hours and nominal wages has slowed slightly reflecting weak production.
However, year-to-year employment growth has been moderate but steady. Thus, employment
and income conditions continue to improve moderately on the whole, but the pace of recovery
has slowed somewhat.
Prices remained stable on the whole, excluding the effect of the consumption tax
hike. Domestic wholesale prices (adjusted for seasonal electricity rates) have declined to some
extent as domestic demand and supply conditions started to ease, particularly in
construction-related goods. The year-to-year declines in corporate service prices on the whole
have been narrowing further owing to the improvement in supply and demand conditions,
particularly for real estate rents and information services, although leasing charges continue
declining. Consumer prices (nationwide, excluding perishables) rose year to year in September,
reflecting the temporary factor; i.e., a rise in medical charges which resulted from medical
insurance reform. Excluding this, however, consumer prices have remained stable at a level
slightly above that of the previous year.
Monetary aggregates, measured in terms of year-to-year growth of M2 + CDs
average outstanding, declined somewhat in October to 2.7 per cent.
Regarding money market rates, the overnight call rate (uncollateralized) has
moved at a level slightly below the official discount rate. The 3-month CD rate has stayed at
around 0.50 - 0.55 per cent. Against the background of uncertainties about future economic
growth, the long-term government bond yield had been declining since the end of May and
reached the record low of 1.5 - 1.6 per cent at the end of October, but recently rose to 1.6 - 1.8
per cent.
With respect to bank lending rates, the short-term prime lending rate has
remained at a record low level of 1.625 per cent since September 1995. The long-term prime
lending rate has been lowered since June and reached a record low of 2.3 per cent in October. In
these circumstances, short- and long-term contracted interest rates for new loans and discounts
(up to September) have stayed at record low levels.
On the stock exchange, the Nikkei 225 stock average has been declining since
August, partly reflecting uncertainties about future economic growth and the fall in U.S. stock
prices, and fell below ¥18,000 in early September. It dropped further after late October as a
result of the precipitous decline in Hong Kong stock prices and temporarily reached around
¥15,000, but has recently recovered to around ¥16,000.
In the foreign exchange market, the yen moved at around ¥119-123 to the U.S. dollar between
September and October. However, the yen later depreciated in early November, owing to
growing concerns about future economic growth, as well as the fall in stock prices. Recently, it
has moved at around ¥125-128. Meanwhile, the yen started to depreciate against the Deutsche
Mark, after having peaked at around ¥62 in mid-August, and has recently moved at around
¥7174.