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Monthly Report of Recent Economic and Financial Developments January 2005 1(The Bank's View 2)

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

  1. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on January 18 and 19, 2005.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on January 18 and 19, 2005.

January 19, 2005
Bank of Japan

Japan's economy continues a recovery trend, although there seem to be somewhat weak movements mainly in production.

While exports have been more or less flat, industrial production seems to be somewhat weak mainly due to inventory adjustments in IT-related sectors. On the other hand, business fixed investment has been on a rising trend, with corporate profits improving. The employment situation has also been on an improving trend and household income has stopped declining. In this situation, private consumption has been steady. Meanwhile, housing investment has been nearly flat, and public investment has been declining.

Japan's economy is expected to continue to recover.

Although the effects of inventory adjustments in IT-related sectors are projected to remain for some time, exports and production are expected to follow an uptrend, as overseas economies will continue to expand and domestic demand will also continue to increase. Structural adjustment pressure stemming from firms' excess capacity and debt has been easing. While firms are likely to continue restraining labor costs, household income is expected to show signs of a gradual increase since corporate profits are increasing and the extent of excess labor as perceived by firms is continuing to ease. Public investment, meanwhile, is projected to be basically on a downtrend.

Developments in IT-related demand and crude oil prices, and their impact on the domestic as well as overseas economies should continue to be noted.

On the price front, the pace of increase in domestic corporate goods prices has become somewhat moderate mainly because crude oil prices have stopped rising. Consumer prices (excluding fresh food) have been declining slightly on a year-on-year basis.

Domestic corporate goods prices are likely to peak out in the immediate future, as commodity prices have stopped rising. Consumer prices are projected to continue falling slightly on a year-on-year basis, as supply and demand conditions are likely to remain loose for the time being, although they are improving.

As for the financial environment, the environment for corporate finance is becoming more accommodative on the whole. The issuing environment for CP and corporate bonds is favorable. Also, the lending attitude of private banks is becoming more accommodative. The lending attitude of financial institutions as perceived by firms has been improving. Meanwhile, the improvement in credit demand in the private sector seems to have stopped temporarily. Under these circumstances, the rate of decline in lending by private banks has not changed recently. However, lending by private banks is still on an improving trend. On the other hand, the amount outstanding of CP and corporate bonds issued continues to be above the previous year's level. The year-on-year growth rate of the monetary base has been at the 4.0-5.0 percent level. The year-on-year growth rate of the money stock is around 2.0 percent. The year-on-year growth rate of banknotes in circulation is at the 2.0-3.0 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, the yen's exchange rate against the U.S. dollar and stock prices have risen compared with last month, while long-term interest rates have been around the same level as last month.

Japan's economy has deviated slightly below the Outlook 3presented in theOutlook for Economic Activity and Prices (the Outlook Report) released in October 2004, partly due to larger-than-anticipated adjustments in production and inventories of IT-related goods. Adjustments in IT-related goods are likely to be completed in or after spring 2005, while overseas economies continue to be on an expanding trend. Hence, the economy is expected to be broadly in line with the Outlook that it will continue recovering and gradually move to a sustainable growth path. As for prices, domestic corporate goods prices are expected to be in line with the Outlook. Consumer prices are also expected to be basically in line with the Outlook, although they may deviate slightly below it depending on the effects of the reduction in telephone charges.

  1. 3Policy Board members made the forecasts for the real GDP growth rates in the Outlook Report released in October 2004 based on the fixed-base year method. At that time, they estimated that the real GDP growth rates were slightly over 1 percent higher by the fixed-base year method compared to the chain-linking method. Hence, the medians of Policy Board members' forecasts for the real GDP growth rates could be translated into around 2.5 percent for fiscal 2004 and around 1.5 percent for fiscal 2005 in terms of the chain-linking method. This method was introduced in the calculation of the GDP deflator in December 2004.