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Monthly Report of Recent Economic and Financial Developments February 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 February 16 and 17, 2005.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on February 16 and 17, 2005.

February 17, 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 basically on a downtrend.

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, domestic corporate goods prices have recently been somewhat weak, mainly because crude oil prices fell back toward the end of last year. Consumer prices (excluding fresh food) have been declining slightly on a year-on-year basis.

Domestic corporate goods prices are likely to be somewhat weak or flat for some time, although their developments will depend on commodity prices at home and abroad. Consumer prices are projected to continue falling slightly on a year-on-year basis because supply and demand conditions are likely to remain loose for the time being, although they are improving, and partly because public utility charges have been reduced.

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. Under these circumstances, the rate of decline in lending by private banks has been diminishing moderately, although the improvement in credit demand in the private sector seems to have stopped temporarily. 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 around 4.0 percent. The year-on-year growth rate of the money stock continues to be 2.0 percent. The year-on-year growth rate of banknotes in circulation has been 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 has fallen compared with last month, while long-term interest rates and stock prices have been around the same level as last month.