Bank of Japan's September report of recent economic and financial
developments1
Bank of Japan, 20 September 2001
* * *
The Bank's View2
Adjustments in economic activity are becoming more severe, as the substantial decline in production,
starting from a fall in exports, is beginning to have a negative influence on employment and income
conditions.
With regard to final demand, net exports (real exports minus real imports) continue to decline,
reflecting not only a slowdown in overseas economies but also sluggish demand for IT-related goods.
Business fixed investment is also decreasing noticeably while exporting conditions continue to
deteriorate. Housing investment remains sluggish and public investment is declining. Meanwhile,
private consumption remains flat on the whole, although there are some weak indicators.
Industrial production continues to decline considerably, reflecting these developments in final demand
and strong excessiveness in inventories of electronic parts and materials. Corporate profits and
business sentiment are also worsening, particularly in manufacturing. Affected by such developments,
household income is weakening gradually.
Turning to the outlook, public investment is expected to follow a declining trend. Net exports are likely
to continue decreasing for a while amid the deceleration in overseas economies and ongoing
inventory adjustments in IT-related goods worldwide. Based on the developments in leading indicators
and judged from the successive downward revisions of firms' investment plans in the information and
communications sector, business fixed investment is also expected to follow a downward trend.
Private consumption is likely to become weak gradually while employment and income conditions
continue to deteriorate. In addition to such developments in final demand, inventory adjustments in
goods such as electronic parts and materials will continue for the time being. Industrial production is,
therefore, expected to follow a declining trend.
As for IT-related goods, although the sluggish final demand of these goods worldwide has been
preventing the progress in inventory adjustments, the view that the adjustments are likely to finish by
around next spring is prevailing. Therefore, the decline production in this sector is expected to cease
some time in the future. However, uncertainty regarding the outlook for the recovery of overseas
economies, particularly for the U.S., is growing further while the global economy continues to
decelerate concurrently. At home, while the income-generating mechanism from corporate profits to
employment and wages is starting to work adversely, government spending is projected to follow a
downward trend. Under these circumstances, it may take some time for overall production activity to
stop declining.
Overall, adjustments in economic activity, starting from the decline in exports, are expected to have a
negative influence on domestic demand gradually and this in turn will possibly prolong the ongoing
adjustments. Moreover, while the economy continues to be in a fragile state, attention should be paid
to the growing risks of a negative impact on the economy induced by developments in foreign and
domestic capital markets via corporate and household confidence.
With regard to prices, import prices are declining mainly reflecting the softening of international
commodity prices. Domestic wholesale prices are also declining somewhat faster because the effects
from the past high crude oil prices and the prior depreciation of the yen have abated, while prices of
electrical machinery and materials continue to decrease. Consumer prices are weakening owing
mainly to the decline in prices of imported products and their substitutes. Corporate service prices
continue to decrease.
As for the conditions surrounding price developments, with the ongoing adjustments in economic
activity, the balance between supply and demand in the domestic market is likely to exert downward
pressure on prices. Furthermore, in addition to the declining trend of machinery prices caused by
technological innovations, the decreases in the prices of goods and services reflecting deregulation
and the streamlining of distribution channels will continue to restrain price developments. Overall,
prices are expected to follow a gradual declining trend for the time being. Moreover, given the high
degree of uncertainty regarding future economic developments, the possibility that weak demand will
further intensify downward pressure on prices warrants careful monitoring.
In the financial market, the overnight call rate declined further and is moving around zero percent as
the current-account balances at the Bank of Japan were increased to around 6 trillion yen due to the
changes in the guideline for money market operations decided at the Monetary Policy Meeting held on
August 14.
Interest rates on term instruments are declining further owing to the monetary easing by the Bank. The
Japan premium remains negligible.
Yields on long-term government bonds are recently moving around 1.35 percent. The yield spreads
between private bonds (bank debentures and corporate bonds) and government bonds are mostly
unchanged.
Stock prices are plunging reflecting the drop in U.S. stocks.
In the foreign exchange market, the yen is currently being traded in the range of 116-119 yen to the
U.S. dollar.
With regard to corporate finance, private banks continue to be more active in extending loans, mainly
to blue-chip companies, while carefully evaluating the credit risks involved. However, the lending
attitudes of financial institutions perceived by small firms are becoming slightly more cautious.
Meanwhile, the fund-raising conditions of firms in the markets for such instruments as corporate bonds
and CP continue to be favorable owing to a decline in market interest rates and the more active stance
of investors to take credit risks.
On the other hand, credit demand in the private sector is declining faster mainly due to a decrease in
business fixed investment while firms continue to reduce their debts.
In view of this, the year-on-year rate of decline in private banks' lending is expanding slightly. The
growth rate of amount outstanding of corporate bonds issued is about 2 percent on a year-on-year
basis. Meanwhile, the amount outstanding of CP issued continues to be at a high level, significantly
exceeding that of the previous year due to the favorable environment for issuing CP.
The growth rate of money stock + CDs) in August was slightly higher than that of the previous
(M2
month due mainly to the inflow from postal savings.
Funding costs for firms continue to be at extremely low levels.
With respect to the recent financial environment, the effects of monetary easing are permeating
through the economy. This can be observed such as in the additional easing in the money market
conditions, further decline in short-term interest rates, higher growth in monetary indicators, and the
improvement in the fund-raising conditions of firms through the markets. However, against the
background of deteriorating corporate earnings and the more cautious lending attitudes of financial
institutions, fund-raising conditions of small firms seem to be becoming more severe. Hence, the
developments in the behavior of financial institutions and corporate financing need careful monitoring.
In addition, it is necessary to carefully monitor the effects of the terrorist attacks in the U.S. on global
financial markets and economic activity.