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Monthly Report of Recent Economic and Financial Developments (March 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 March 13, as the basis of monetary policy decisions.

March 17, 1998
Bank of Japan

  • The English translation of the full text will be available at the end of March

Japan's economy remains stagnant with increasing downward pressures on economic activities.

With respect to final demand, net exports have continued to increase and are underpinning the economy. Business fixed investment, which had been on an upward trend, however, seems to have peaked out. 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 such weak final demand, inventory adjustment pressures have been intensifying, and industrial production has continued to decline. This has consequently been exerting a negative influence on corporate profits, employment, and income conditions.

As regards the outlook for the economy, positive effects are expected from the measures to stabilize the financial system and from the special tax-cut measures. However, a conspicuous recovery in domestic final demand is hardly foreseeable for some time, and the recent weakening of the income formation could lead to a further deterioration in domestic demand. In addition, downside risks such as adjustments in other Asian economies and the financial developments in Japan (as explained below) should be carefully monitored.

With regard to prices, wholesale prices have continued to decline. On the other hand, the year-to-year change in consumer prices, excluding the effects of institutional changes (such as the rise in the consumption tax rate), has remained at a level slightly above that of the previous year, although its margin of increase has been narrowing. As for the future, prices overall are likely to soften for some time since the output gap in the domestic economy may continue to expand and overseas commodity prices have declined due to the deterioration of market conditions in Asia.

Financial markets have shown the following developments. In the money markets, interest rates on term instruments have clearly started to decline. This is partly due to the Bank's ample provision of funds through contracts that mature after the fiscal year-end. It should be noted, however, that the levels of such rates are still high compared to those prevailing before autumn 1997. This can be attributed to the continuing cautious attitudes of market participants toward credit risk. Long-term government bond yields have been on a declining trend since the beginning of February reflecting weak economic indicators, although with some fluctuations caused by market anticipation of an additional economic package. Stock prices have been moving in a narrow range reflecting two offsetting factors: the weakness in economic indicators and corporate earnings, and a progress in financial system stabilization measures.

With respect to monetary aggregates, growth in money stock picked up further in January partly due to the substantial shift of funds away from investment trusts. Meanwhile, the decline in private bank lending expanded in February. However, corporate financing through channels other than bank lending, such as via the capital market, has expanded and total volume of funds raised by firms may have increased. Nevertheless, it should be noted that banks continue to be cautious in extending credits with a view to improving their medium- to long-term profitability and financial soundness, although capital constraints on their lending capacity have recently eased somewhat. In such circumstances, some firms, especially small and medium-sized firms, are facing difficult financing conditions. Moreover, fund-raising costs of firms appear to have increased amid heightened awareness of credit risk. These financial developments and their influence on the economy continue to warrant a careful monitoring.