bank of japan ’ s january report of recent economic and financial developments1 bank of japan, communication, 19 january 2000. * * * the bank ’ s view2 japan ’ s economy, which had stopped deteriorating, has recently started to improve, with exports and production increasing. the economic environment surrounding private demand is gradually improving, as seen in the continuing increase in corporate profits. however, clear signs of a selfsustained recovery in private demand have not been observed yet. with regard to final demand, housing investment has recently peaked out, and public investment seems to have stopped rising. recovery in private consumption continues to be weak through lack of notable improvements in employment and income conditions. business fixed investment, which had been on a downward trend, shows signs of leveling off. meanwhile, net exports ( real exports minus real imports ) continue to follow an upward trend, despite monthly fluctuations, due to an upturn in overseas economies. reflecting such developments in final demand and progress in inventory adjustment, industrial production continues to rise and an increase in corporate profits is becoming distinct. in this situation, corporate sentiment continues to improve. regarding the employment condition, there are some indicators that suggest a slowdown of 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, 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 and have favorable effects on corporate profits and then on household income. by contrast, it is highly probable that housing investment will remain flat for the time being. in addition, firms are expected to maintain a cautious stance toward business fixed investment based on their modest prospects for sales, although corporate restructuring is improving profitability to some extent. moreover, it seems that the appreciation of the yen since the summer of 1999 will have an adverse effect on corporate profits in the near term. in these circumstances, future economic developments still require careful monitoring in spite of the gradual recovery in the environment for private demand. furthermore, it is important to

. s. stock market. subsequently, they recovered reacting to the rebound in u. s. stocks and have returned to the level of above 19, 000 yen. in the foreign exchange market, the yen once appreciated to the 101 - 102 yen level against the u. s. dollar at the beginning of the year, but then depreciated and is currently being traded in the range of 105 - 107 yen. 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, firms continue to reduce debts as part of their balance - sheet restructuring measures. as a result, credit demand in the private sector has continued to be basically stagnant, and thus private banks ’ lending has remained sluggish. issuance of corporate bonds and cp has been steady at present. the growth in money stock ( m2 + cds ) has slowed somewhat reflecting the stagnant private credit demand. in this financial environment, the financial position of firms is easing, and the lending attitude of financial institutions as perceived by firms is becoming less severe. it continues to warrant careful monitoring how these favorable developments in corporate financing environment will affect economic activities.