The Bank of Japan's June report on recent economic and financial developments
Bank of Japan, Communication, 16 June 1999.
The Bank's View2
Japan's economy, at present, has stopped deteriorating, but clear signs of recovery have not
been observed yet.
With regard to final demand, business fixed investment has basically been on a downward
trend, although there was a slight improvement in early 1999. Recovery in private
consumption continues to be weak on the whole. Net exports (exports minus imports) are
decreasing slightly at present, due mainly to an increase in imports. Meanwhile, housing
investment has been recovering. Public works seem to be increasing rapidly against the
background of the surge in orders in early spring.
Reflecting such developments in final demand and continued progress in inventory
adjustment, industrial production has stopped decreasing. The deterioration in corporate and
consumer sentiment seems to have ceased due to this economic situation and the effects of
measures taken to restore the stability of Japan's financial system. However, corporate profits
remain weak, and employment and household income conditions are deteriorating as the
unemployment rate remains historically high and wages continue to be below the previous
year's level. In corporate finance, firms' concern about the availability of funds in the future
has subsided, but has not completely disappeared yet.
As for the outlook, with the progress in inventory adjustment gradually paving the way for a
recovery in production, the government's economic measures and the monetary easing by the
Bank will continue to underpin the economy. Improvements in the financial environment,
such as alleviation of concern about Japan's financial system, are also expected to exert
positive effects on the economy gradually. Moreover, the recovery of overseas economies,
especially of Asian economies, is likely to have a positive effect on domestic production.
With respect to corporate activities, however, firms have started taking steps toward full-scale
restructuring, facing the continued decline in profits. Although such corporate restructuring is
expected to improve productivity, it may, in the short run, reduce fixed investment and
discourage household expenditure through the resulting deterioration in employment and
income conditions. Under such circumstances, it is still difficult to expect an immediate self-
sustained recovery in private demand. Overall economic developments require careful
monitoring in consideration of the above points. It is also important to promote structural
reform in order to assure the economy's sustained growth in the medium term.
With regard to prices, import prices continue to rise due to the bottoming out of international
commodity prices such as crude oil prices. The pace of decline in domestic wholesale prices is
slowing due to a rise in prices of some products closely related to international commodities,
such as those of petroleum products. On the other hand, corporate service prices continue to
decline. Consumer prices remain weak. In relation to price developments in the future, there is
a possibility that prices overall, which have been on a downtrend, will temporarily level off
reflecting the rise in import prices. However, distinct narrowing in the output gap is unlikely
for the time being even though the economy has stopped deteriorating, and wages continue to
decline. Thus, downward pressure on prices is expected to remain.
In the financial market, the overnight call rate has stayed at nearly zero, and many financial
institutions have become confident about the availability of liquidity. Interest rates on term
instruments have declined further, reflecting the market's view that monetary easing will
continue for some time. The Japan premium has almost disappeared. Furthermore, the yield
spread between government bonds and private bonds--bank debentures and corporate bonds-
-has narrowed.
Yields on long-term government bonds have risen since late May to the current level of
around 1.6-1.7 percent. Stock prices, which had generally been in the range of 16,000-17,000
yen, have recently risen and exceeded 17,000 yen.
The amount outstanding of funds in the call money market has continued to decrease. To date,
this has not led to any difficulty in funds settlement, but close attention should be paid to
future market developments.
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 have
gradually become more active than before in extending loans, especially for projects involving
relatively small credit risks.
However, credit demand for economic activities such as business fixed investment remains
weak. In addition, firms' moves to increase their on-hand liquidity are apparently settling
down. As a result, credit demand in the private sector has weakened further.
Money stock (M2+CDs) has recently been showing a slightly higher year-to-year growth rate,
mainly because firms' curtailment of on-hand liquidity has been less significant than that of
the same period in the previous year.
In these financial environments, credit conditions, which had tightened previously, 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 firms'
propensity to invest.