Bank of Japan's November report of
recent economic and financial developments1
Bank of Japan, Communication 15 November 1999.
* * *
The Bank's view2
Japan's economy, which had stopped deteriorating, is currently turning to improve, with exports and
production increasing. However, clear signs of a self-sustained recovery in private demand have not
yet been observed.
With regard to final demand, business fixed investment has been on a downward trend, although the
pace of its decline is slowing. Recovery in private consumption continues to be weak through lack of
notable improvements in employment and income conditions. Housing investment has recently peaked
out, and public investment seems to have stopped rising. Meanwhile, net exports (real exports minus
real imports) have increased further due to an upturn in overseas economies.
Reflecting such developments in final demand and continued progress in inventory adjustment,
industrial production is increasing. Additionally, corporate profits have started picking up. In this
situation, corporate sentiment continues to improve. Regarding the employment condition, there are
some indicators that suggest a slowdown of the decrease in the number of employees. The positive
developments in corporate profits and sentiment, however, have not necessarily stimulated business
activities, because firms still strongly feel that they have excess capacity and employees and that they
should reduce their debts to restore financial soundness. In addition, efforts by firms to reduce
personnel expenses have prolonged the severity of households' income conditions.
As for the outlook, improvements in the overall financial environment partly due to the monetary
easing by the Bank, along with a series of economic measures taken by the government including
those announced recently, are expected to continue underpinning the economy. Moreover, the positive
impact on domestic production of the recovery of overseas economies, especially of Asian economies,
is likely to continue for some time. By contrast, it is highly probable that housing investment will
remain flat for the time being. In addition, under cautious sales outlook, firms are expected to continue
corporate restructuring to improve their profitability. Such restructuring is unavoidable to enhance
medium-term growth of the corporate sector and thereby that of the overall economy. In the short run,
however, it reduces fixed investment, and also delays an improvement in employment and income
conditions, thereby discouraging household expenditure. Moreover, it seems that the recent
appreciation of the yen will have an adverse effect on corporate profits in the near term. Under such
circumstances, it is still difficult to expect an immediate self-sustained recovery in private demand,
even though an upturn in economic activities, such as production, is expected to give favorable effects
to corporate and household income gradually. Consequently, economic developments still require
careful monitoring, although the economy is turning to improve. Further, it is important to promote
structural reform in order to encourage a recovery in private demand.
With regard to prices, import prices are increasing somewhat due to the rise to date in international
commodity prices, such as crude oil prices. Domestic wholesale prices, notwithstanding the fall in
prices of electric machinery, are flat due to an increase in prices of some products closely related to
international commodities, such as those of petroleum products. Consumer prices remain unchanged.
Corporate service prices are still falling slowly. As regards the movements of overall prices in the
future, they are likely to be flat despite the continued fall in prices of some goods and services, as the
rise in crude oil prices to date will continue to be passed on to prices of other products for a while.
However, substantial narrowing in the output gap led by a recovery in private demand is unlikely for
the time being, and wages continue to follow a declining trend. Thus, downward pressure on prices is
expected to remain.
In the financial market, the overnight call rate has stayed at nearly zero, and financial institutions have
been confident about the availability of overnight funds. The amount outstanding of funds in the call
money market has remained generally stable since the middle of June.
As for interest rates on term instruments, short-term rates maturing before the year-end have remained
at a historically low level. Meanwhile, rates maturing beyond the year-end are rising due to market
participants' concern over the Year 2000 problem.
The Japan premium has continued to be nearly zero for short-term transactions, but there remains a
small premium for transactions maturing beyond the year-end.
Yields on long-term government bonds rose to around 1.9 per cent in late October. They declined
somewhat thereafter and are presently moving between 1.7 and 1.8 per cent again. The yield spread
between private bonds (bank debentures and corporate bonds) and government bonds once stopped
contracting. However, there has recently been a conspicuous narrowing in the spread, primarily
between private bonds with relatively low credit ratings and government bonds.
Stock prices, after having declined in October against the background of the weak tone in U.S. stock
prices, rebounded reacting to the recovery in U.S. stock prices, and are currently moving around
18,000-18,500 yen.
In the foreign exchange market, the yen has recently been traded at around 104-107 yen to the U.S.
dollar.
With regard to corporate finance, private banks have basically retained their cautious lending attitude.
However, constraint that had been caused by severe fund-raising conditions and insufficient capital
base has eased considerably. Under these circumstances, major banks are gradually becoming more
active in extending loans, while carefully evaluating the credit risks involved.
However, credit demand for economic activities such as business fixed investment remains weak. In
addition, some firms have been trying to reduce debts using their on-hand liquidity. As a result, credit
demand in the private sector has continued to be basically stagnant, and thus private banks' lending
has remained sluggish. Corporate bond issuance has been steady. Meanwhile, CP issuance has been
increasing with the year-end approaching.
The year-to-year growth rate of money stock has declined to 3.0-3.5 per cent mainly due to
(M2+CDs)
the weakness in credit demand in the private sector.
In this financial environment, credit conditions have eased somewhat.
The following continue to warrant careful monitoring: how actively investors will take risks; how far
private banks will ease their lending stance; and how these changes will affect economic activities.