Monthly Report of Recent Economic and Financial Developments May 2004 1(The Bank's View 2)
(English translation prepared by the Bank's staff based on the Japanese original)
- This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on May 19 and 20, 2004.
- The Bank's view was determined by the Policy Board at the Monetary Policy Meeting held on May 19 and 20, 2004.
May 20, 2004
Bank of Japan
Japan's economy continues to recover gradually, and domestic demand is becoming firmer.
Exports have been increasing substantially, and business fixed investment continues its path of recovery. Reflecting these developments, industrial production has also been increasing. The decline in household income is gradually coming to a halt, and private consumption is showing some positive movements. Meanwhile, housing investment has been nearly flat and public investment has been declining.
As for the outlook, Japan's economy is expected to gain further momentum gradually, as it continues to recover moderately for the time being.
Overseas economies are projected to continue growing relatively fast. Based on this projection, it is likely that final demand, particularly exports and business fixed investment, will continue recovering, and that production will also continue increasing. Excessive debt in the corporate sector and other structural factors still persist, but their impact has been waning. Although firms are determined to continue restraining their labor costs, the increases in production and corporate profits are expected to exert positive effects gradually on employment and income situations. Public investment, meanwhile, is projected to be on a downtrend.
On the price front, domestic corporate goods prices have been rising, due to the strengthening of commodity prices at home and abroad and to the improvement in supply and demand conditions. The year-on-year rate of change in consumer prices (excluding fresh food) has been close to zero, while temporary factors have exerted upward pressure on prices.
As for the outlook, domestic corporate goods prices are expected to continue increasing for some time, partly due to the recent rise in crude oil prices. On the other hand, the output gap still remains, although it is gradually narrowing. Under these circumstances, consumer prices are projected to continue falling slightly on a year-on-year basis, as the upward pressure from the above temporary factors, including medical costs, dissipates.
As for the financial environment, the environment for corporate finance is becoming more accommodative on the whole, although it remains severe for firms with high credit risks. The issuing environment for CP and corporate bonds is favorable on the whole. Also, the lending attitude of private banks continues to be slightly more accommodative. The lending attitude of financial institutions as perceived by firms continues to improve. The pace of decline in credit demand in the private sector is becoming somewhat moderate. Under these circumstances, the amount outstanding of CP and corporate bonds issued continues to be above the previous year's level, and the rate of decline in lending by private banks has been diminishing slightly. As growth of banknotes in circulation is on a downtrend mainly due to decreasing anxieties about the financial system, the year-on-year growth rate of the monetary base is at the 6.0-7.0 percent level. The year-on-year growth rate of the money stock is at the 1.5-2.0 percent level. As for developments in financial markets, money market conditions continue to be extremely easy, as the Bank of Japan continues to provide ample liquidity. In the foreign exchange and capital markets, long-term interest rates have been around the same level as last month, while the yen's exchange rate against the U.S. dollar and stock prices have fallen from last month.