Bank of Japan's October report of recent economic and financial
developments1
Bank of Japan, 14 October 2003.
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The Bank's View2
The foundation for a gradual recovery in Japan's economy is being laid, as the environment for
exports and business sentiment have improved.
With regard to final demand, housing investment remains sluggish and public investment is declining.
Private consumption also continues to be weak. Meanwhile, business fixed investment is recovering
gradually and net exports have recently started to increase somewhat.
In response to these developments in final demand, corporate profits are following a moderate uptrend
and business sentiment is improving, although industrial production is still basically flat. Meanwhile,
the number of employees has stopped falling and the pace of decline in wages is gradually slowing.
However, the employment and income situation of households overall still remains severe, as the
unemployment rate continues to be high, albeit with some fluctuations.
Turning to the economic outlook, overseas economies are expected to maintain a relatively steady
recovery mainly in the United States and in East Asia. Under these circumstances, it is likely that
exports will continue to increase and industrial production will turn up gradually.
With respect to domestic demand, public investment is projected to follow a declining trend, and
private consumption is likely to remain weak for some time since the employment and income situation
is unlikely to improve markedly. Meanwhile, the recovery trend in business fixed investment is
expected to become clearer, mainly in large manufacturing firms, whose investment has been thus far
significantly restrained despite the recovery in their profits.
Overall, with the recovery in overseas economies, exports and production will increase, which in turn
will gradually initiate momentum for an economic recovery in Japan. However, it is expected to take
some more time before a self-sustaining recovery in domestic demand gains momentum, given
persisting downward pressures from structural adjustments, such as firms' reduction of excess debt
and restraint on labor costs. In addition, uncertainty still exists with respect to the outlook for the
environment for exports, as the employment situation in the United States continues to be sluggish
and the yen exchange rate has been unstable, tending toward appreciation against the U.S. dollar.
On the price front, import prices have stopped declining due to the uptrend in international commodity
prices, especially crude oil prices, until this summer. Under these circumstances, domestic corporate
goods prices are more or less flat, which is also partly due to the rise in tobacco tax. Meanwhile,
corporate services prices continue a year-on-year decrease of slightly over 1 percent. As for consumer
prices, the year-on-year rate of decline diminished to 0.1 percent in August due mainly to the special
factors, such as the increase in medical treatment costs in April and the rise in tobacco tax in July.
As for the outlook for prices, import prices are projected to head for a decline again due to the recent
appreciation of the yen. Meanwhile, domestic corporate goods prices are likely to remain more or less
flat for the time being, since there is some time lag for these import price developments to have effects
on the domestic prices and also the rate of decline in machinery prices is diminishing. As for consumer
prices, although it is possible that the year-on-year decline may stop temporarily in the period ahead
due to special factors such as a rise in rice prices, they are basically projected to continue falling
gradually, since the supply-demand condition in the macroeconomy still remains considerably loose
despite its recent gradual improvement.
As for the financial environment, the outstanding balance of current accounts at the Bank of Japan
moved almost at the 29-30 trillion yen level in September, as the Bank provided ample liquidity, but
rose to 34.6 trillion yen on September 30 as a result of even more ample liquidity provision by the
Bank. Under these circumstances, the overnight call rate moved at around zero percent, except for the
temporary rise on September 30. Interest rates on term instruments remained steady on the whole,
although TB and FB rates rose from mid to late September. Meanwhile, interest rates on Euroyen
futures are declining gradually, although they were at somewhat high levels in September mainly in
distant contracts.
Yields on long-term government bonds fluctuated due partly to portfolio adjustments toward the fiscal
half year end under the improved outlook for Japan's economy. Recently, they declined slightly partly
because investors bought government bonds on dips. The yields are moving at around 1.3 percent.
Meanwhile, yield spreads between private bonds (bank bonds and corporate bonds) and government
bonds are virtually unchanged on the whole.
Stock prices rose substantially toward mid-September as foreign investors continued to invest in
Japanese stocks, but declined toward the end of September due to the rapid appreciation of the yen
and growing concern over price adjustments. However, they recovered after the rebound in U.S. stock
prices. The Nikkei 225 Stock Average is moving at around 10,500 yen.
In the foreign exchange market, the yen rose sharply as market participants became less sensitive to
a possible market intervention around the time of the G-7 meeting and as foreign investors continued
to invest in Japanese stocks. The yen is currently traded in the range of 109-111 yen to the U.S.
dollar.
With regard to corporate finance, private banks remain cautious in extending loans to firms with high
credit risks, while they continue to be more active in extending loans to blue-chip companies. Their
lending attitudes seem to be becoming slightly more accommodative in areas such as terms and
conditions for loans. Meanwhile, the lending attitudes of financial institutions as perceived by firms in
general are improving somewhat, although those perceived by small firms remain severe. In the
corporate bond and CP markets, the issuance spreads remain steady and the favorable issuing
environment is virtually unchanged on the whole, especially for firms with high credit ratings, although
some firms still seem to be taking a wait-and-see attitude in the corporate bond issuance market in
view of the rise in long-term interest rates.
Credit demand in the private sector continues to follow a downtrend, mainly because firms' cash flow
remains above business fixed investment and firms are continuously reducing their debts.
Amid these developments, private banks' lending continues to decline at around 2 percent on a
yearon-year basis. The amount outstanding of CP issued is above the previous year's level. The amount
outstanding of corporate bonds issued is around the previous year's level.
Meanwhile, according to business surveys, the financial positions of firms in general are improving
slightly, although those of small firms remain severe.
The year-on-year growth rate of the monetary base continues to be around 20 percent. The
year-onyear growth rate of the money stock is around 2 percent.
Funding costs for firms continue to be at extremely low levels on the whole, although corporate bond
issuance rates are increasing slightly reflecting the rise in long-term interest rates.
Against the above background, the financial developments are summarized as follows. Money market
conditions continue to be extremely easy. Meanwhile, long-term interest rates are at a slightly lower
level than last month. Stock prices are basically around the same level as last month. Growth rates of
the money stock and the monetary base relative to economic activity remain high. In corporate
finance, the favorable issuing environment of corporate bonds and CP is virtually unchanged on the
whole, especially for firms with low credit risks. However, there has been no significant change in the
severity of the funding environment for firms, particularly for firms with high credit risks. Developments
in the financial and capital markets, the behavior of financial institutions, and the situation of corporate
finance continue to require close monitoring.