Bank of Japan's monthly report of recent economic and financial developments1
Bank of Japan, Communication, 16/02/99.
The Bank's View2
The economic deterioration in Japan has become moderate against the background of the
increase in public investment.
Business fixed investment has been declining significantly. As for housing investment,
housing starts are bottoming out but remain at a low level. Recovery in private consumption
has been weak on the whole, although partial improvement in sales of goods has been
observed. Meanwhile, net exports (exports minus imports) basically remain on a gradually
increasing trend, and public investment is increasing considerably. Reflecting this
development of final demand and the continued progress in inventory adjustments, industrial
production, which had been on a downtrend, is leveling off.
Corporate profits continue to decline. Employment and household income conditions are still
deteriorating as the unemployment rate is at a historically high level, and winter bonuses have
decreased significantly. Conditions in corporate finance are currently improving, but firms
apparently cannot remove their anxiety about the availability of funds in the future.
Consequently, corporate and household sentiment remains cautious, and a recovery has not
yet been observed in private demand.
As for the future developments, the increase in public investment is likely to underpin the
economy toward the first half of fiscal 1999 with the implementation of the government's
economic measures. Furthermore, the Bank's monetary and financial measures and the
government's measures to alleviate the credit crunch will continue to be in effect.
Nevertheless, an immediate self-sustained recovery in private demand is hardly expected,
since corporate profits and household income are still deteriorating and the constraints from
corporate finance are likely to persist for some time due to cautious lending attitudes of
private banks. Moreover, attention should be paid to (1) the effects of the continued
appreciation of the yen since autumn 1998; (2) those of the recent rise in long-term interest
rates; and (3) the uncertainty in financial and economic developments abroad. To lead Japan's
economy into a steady recovery, it is important to prepare an environment where firms and
households can regain confidence in Japan's economic future by, for instance, promptly
restoring the stability of the financial system.
With regard to prices, reflecting the large output gap, domestic wholesale prices are on a
downtrend, and corporate service prices are weakening. Consumer prices have increased
above the previous year's level due to the rise in prices of perishables. Excluding this
temporary effect, consumer prices basically remain weak. As for the outlook, although public
investment is expected to increase, distinct narrowing in the output gap is hardly expected
toward the first half of 1999, as private demand is likely to remain sluggish. Furthermore, the
decline in wages and the appreciation of the yen since autumn 1998 are likely to continue
exerting downward pressure on prices. Hence, prices are expected to remain on a downtrend.
In the financial markets, the Japan premium and Euro-yen interest rates (both on three-month
contracts) remain stable despite the approach of the fiscal year-end. This reflects the
abatement of the market's anxiety about liquidity and credit risks of Japanese banks against
the background of the Bank of Japan's maintenance of a decisive stance on easy monetary
policy as well as the formulation of the framework to restore the stability of Japan's financial
system.
Yields on Japanese government bonds have risen again reflecting the market's concern over
the prospective expansion of fiscal deficits. In the foreign exchange market, the trend has been
toward a higher yen. Stock prices continue to be weak. Considering that these developments
can be a hindrance to an economic recovery, their ensuing developments require close
attention.
With regard to corporate finance, credit demand for economic activities remains weak, as a
result of the significant decrease in business fixed investment. Firms' moves to increase their
on-hand liquidity in the face of difficult fund-raising conditions are gradually settling down.
Although private banks have basically retained their cautious lending stance, they continue to
actively utilize the credit guarantee system. As a result, the previously tightened credit
conditions are easing somewhat.
Nevertheless, private banks and capital market participants are still cautious of corporate
credit risk, and thus firms with relatively low credit ratings remain under severe fund-raising
conditions.
The situation continues to warrant careful monitoring, particularly with regard to how
corporate finance develops toward the end of the fiscal year.
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