Bank of Japan's April report of recent economic and financial developments1
Bank of Japan, Communication, 13 April 1999.
The Bank's View2
Japan's economy, at present, appears to have stopped deteriorating.
With regard to final demand, business fixed investment has been declining, and recovery in
private consumption continues to be weak on the whole. Net exports (exports minus imports) are
leveling off. Housing investment has started recovering, and public works orders are increasing
considerably.
Reflecting such development of final demand and 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 as well as the subsidence of the public's anxiety
about the stability of Japan's financial system. However, corporate profits remain weak, and
employment and household income conditions continue to deteriorate. In corporate finance,
firms' concern about the availability of funds in the future is gradually abating, but has not
completely disappeared.
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 underpin the economy. In addition, the anxiety about the stability of the financial
system is easing against the background of the injection of public funds into banks, and stock
prices are recovering. These improvements in the financial environment are also expected to exert
positive effects on the economy gradually. With respect to corporate activities, however, firms
have started taking steps toward full-scale restructuring, facing the continued decline in profits
and strongly becoming aware of a need to improve their balance sheet. 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,
selfsustained recovery in private demand. Overall economic developments require careful monitoring
in consideration of the above points. It is also important to prepare an environment for a smooth
structural reform that assures the economy's sustained growth in the medium term.
With regard to prices, reflecting the large output gap, domestic wholesale prices are on a
downtrend, and corporate service prices are weakening. Consumer prices also remain weak. In
relation to price developments in the future, distinct narrowing in the output gap is unlikely for
the time being even though the economy appears to have stopped deteriorating. Furthermore, the
decline in wages is likely to continue exerting downward pressure on prices. Hence, prices are
expected to remain on a downtrend.
The amount outstanding of funds in the call money market, after showing a recovery toward the
previous fiscal-year end, has been decreasing again since the beginning of the new fiscal year, as
institutional investors shifted part of their funds to highly-liquid deposits of banks. Although the
shrinkage of the market has not led to any difficulty in funds settlement, close attention should be
paid to the market development.
Long-term interest rates are declining gradually reflecting sluggish credit demand in the private
sector. Stock prices have been firm against the background of the market's appreciation of moves
toward corporate restructuring and the rise in U.S. stock prices.
With regard to corporate finance, credit demand for economic activities such as fixed investment
remains weak. Firms' moves to increase their on-hand liquidity in the face of difficult
fundraising conditions are settling down.
Private banks have basically retained their cautious lending stance, facing the worsening
performance of borrower companies. However, severity in their fund-raising conditions has been
alleviated, and their insufficient capital base has been increased. Under these circumstances, it
seems that banks have started to extend loans more actively than before especially for projects
involving relatively small credit risks.
As a result, credit conditions, which tightened previously, are now easing somewhat. It should be
noted, however, that firms with relatively low credit ratings remain under severe financing
conditions. The situation continues to warrant careful monitoring on the extent to which private
banks will ease their lending stance, and how the change will affect firms' propensity to invest.