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Monthly Report of Recent Economic and Financial Developments (July 1999) 1(The Bank's View 2) *

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

  1. This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on July 16, 1999.
  2. The Bank's view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on July 16 as the basis of monetary policy decisions.

July 21, 1999
Bank of Japan

  • The English translation of the full text will be available in early August

Japan's economy, at present, has stopped deteriorating, and corporate sentiment has improved slightly. However, clear signs of a self-sustained recovery in private demand have not been observed yet.

With regard to final demand, business fixed investment has basically been on a downward trend. Recovery in private consumption continues to be weak on the whole. Net exports (exports minus imports) are decreasing slightly at present, due mainly to an increase in imports. Meanwhile, housing investment has continued to recover, and public works seem to be basically following a rising trend.

Reflecting such developments in final demand and continued progress in inventory adjustment, industrial production has stopped decreasing. In addition, corporate sentiment has improved mainly due to the effects of measures taken to restore the stability of Japan's financial system, the continued monetary easing by the Bank, and a recovery in stock prices. This improvement in corporate sentiment, however, has not necessarily stimulated business activities, because firms strongly feel that they have excess capacity and employees and their profits remain weak. Consumer sentiment has also improved, and this seems to be underpinning household expenditures despite the worsening of employment and income conditions. This improvement in sentiment, however, is not strong enough to push up private consumption.

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 continue to underpin the economy. Improvements in the financial environment, such as the alleviation of concern about Japan's financial system, are also expected to exert positive effects on the economy gradually. Moreover, the recovery of overseas economies, especially of Asian economies, is likely to have a positive impact on domestic production. Nevertheless, under cautious sales plans, firms are implementing further restructuring to improve their profitability. 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 self-sustained recovery in private demand. Overall economic developments require careful monitoring in consideration of the above points. It is also important to promote structural reform in order to assure the economy's sustained growth in the medium term.

With regard to prices, import prices continue to rise due to the bottoming out of international commodity prices such as crude oil prices. Domestic wholesale prices are leveling off due to progress in inventory adjustment as well as an increase in prices of some products closely related to international commodities, such as those of petroleum products. Consumer prices are also leveling out. On the other hand, corporate service prices continue to decline. For a while, movements of overall prices are likely to be flat, as import prices are rising and the decline in domestic commodity prices has come to a halt reflecting the progress in inventory adjustment. However, distinct narrowing in the output gap is unlikely for the time being even though the economy has stopped deteriorating, and wages continue to decline. Thus, downward pressure on prices is expected to remain.

In the financial market, the overnight call rate has stayed at nearly zero, and many financial institutions have been confident about the availability of liquidity. Interest rates on term instruments have slightly increased mainly because of the GDP data for the January-March quarter, which were stronger than the market's forecast, and market participants' concern over the Year 2000 problem. The Japan premium has almost disappeared.

Yields on long-term government bonds rose to the level of 1.8-1.9 percent at one time, but have declined to around 1.7 percent. The yield spread between government bonds and private bonds--bank debentures and corporate bonds--has continued to narrow.

Stock prices have risen and recently exceeded 18,000 yen reflecting the market's improved view of the prospects for Japan's economy and the strength of U.S. stock prices.

The amount outstanding of funds in the call money market has remained almost stable since the middle of June. To date, this has not led to any difficulty in funds settlement, but close attention should be paid to future market developments.

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 have gradually become more active than before 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' moves to increase their on-hand liquidity have settled down. As a result, credit demand in the private sector has weakened further, and thus private banks' lending has remained sluggish.

Money stock (M2+CDs) has recently shown a slightly higher year-to-year growth partly due to an increase in fiscal expenditure.

In this financial environment, credit conditions, which had tightened previously, have eased somewhat.

The following continue to warrant careful monitoring: how actively investors will take risks; how far private banks will ease their lending stance; and how these changes will affect firms' propensity to invest.