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Monthly Report of Recent Economic and Financial Developments (February 1998) (The Bank's View 1) *

(English translation prepared by the Bank staff based on the Japanese original)

  1. The Bank's view on recent economic and financial developments, approved by the Policy Board at the Monetary Policy Meeting held on February 13, as the basis of monetary policy decisions.

February 17, 1998
Bank of Japan

  • Full text of this report will be published in early March.

Japan's economy remains stagnant. Sluggish domestic demand, especially household expenditures, has been exerting negative influence upon production, employment and income. Corporate sentiment has also weakened.

With respect to final demand, net exports have continued to increase and are upholding the economy. Business fixed investment that had followed an upward trend, however, has recently become lackluster. Meanwhile, private consumption has continued to stagnate reflecting cautious household sentiment. Housing investment has continued to be weak and public-sector investment has been decreasing. Reflecting the weak final demand, inventory adjustment pressures have been intensifying, and industrial production has continued to decline. As a result, the pace of improvement in employment and income conditions has continued to slow, and the positive growth cycle of production, income, and expenditures has stalled.

As regards the outlook of the economy, external demand is expected to continue upholding the economy and the special tax-cut measures are likely to have positive effects on the household expenditure. Overall, however, the economy is likely to remain stagnant for a while, because prominent recovery in final demand is hardly foreseeableunder the heightened pressures of inventory adjustment. Given the slowdown in growth, the economy is considered to be vulnerable to further negative impacts. In these circumstances, effects of adjustments in the Asian economies on Japan's economy such as exports, as well as those of financial developments on the real economy (as explained below), should be carefully observed.

With regard to prices, wholesale prices have declined reflecting a slack in supply and demand conditions of goods. Meanwhile, consumer prices have remained at a level slightly above that of the previous year when observed excluding the effects of institutional changes such as the rise in the consumption tax rate. Thus, prices overall remained stable and this trend is expected to continue in the immediate future. However, while the output gap in the domestic economy is unlikely to diminish for some time, downward pressures on domestic prices seem to have been increasing, since overseas commodity prices have declined reflecting the deterioration of market conditions in Asia.

Financial markets have shown the following developments. In the money markets, interest rates on term instruments, which once declined slightly in mid-January, have again started to rise in the last half of the month. This reflects the persistently cautious attitudes of market participants toward liquidity and credit risks associated particularly with fiscal-year-end settlement in March. Meanwhile, there were some positive developments in reaction to policy measures to stimulate the economy and to stabilize the financial system. Stock prices have rebounded, yields on long-term government bonds have slightly increased, and the yen has appreciated. However, a full recovery in the market confidence is yet to be seen.

Monetary aggregates, as indicated by developments in private bank lending and money stock, have remained almost unchanged as a whole. With respect to lending attitudes of financial institutions, capital adequacy constraints appear to have become somewhat less binding due to the rebound in stock prices, the appreciation of the yen, and the expectations for the effects of policy measures to stabilize the financial system. However, financial institutions are still cautious in extending loans. In addition, fund-raising cost of firms, in both borrowings from banks and direct financing in capital markets, have been increasing to some extent especially for firms with relatively high credit risk. Financial institutions' lending attitudes, developments in capital markets, and their effects on corporate financing will have to be carefully monitored.