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Monthly Report of Recent Economic and Financial Developments August 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 August 8 and 9, 2005.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on August 8 and 9, 2005.

August 9, 2005
Bank of Japan

Japan's economy continues to recover, with the progress of adjustments in IT-related sectors.

Exports are increasing, albeit moderately, and industrial production is also on an uptrend with some fluctuations as inventory adjustments in the IT-related sectors are progressing. Business fixed investment has continued to increase, reflecting high corporate profits. Household income has been rising moderately, as the employment situation has been improving and wages have picked up. In this situation, private consumption has been steady. Meanwhile, housing investment has been nearly flat, and public investment has basically been on a downtrend.

Japan's economy is expected to continue to recover.

Growth in exports is expected to accelerate gradually, as overseas economies continue to expand. Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income, while structural adjustment pressure stemming from firms' excess capacity and debt has almost dissipated. In light of these increases in demand both at home and abroad, as well as the progress of adjustments in the IT-related sectors, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to remain on a downtrend.

On the price front, domestic corporate goods prices have increased, mainly reflecting the effects of the rise in crude oil prices. Consumer prices (excluding fresh food) have been declining slightly on a year-on-year basis, partly due to the reduction in electricity and telephone charges.

Domestic corporate goods prices are likely to continue on an increasing trend, but the rate of growth is expected to slow for the time being. On the other hand, consumer prices are projected to continue falling slightly on a year-on-year basis for the time being, partly reflecting the effects from the reduction in electricity and telephone charges, although supply and demand conditions are likely to continue improving gradually.

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. The pace of decline in credit demand in the private sector is becoming somewhat moderate. Under these circumstances, the rate of decline in lending by private banks has been diminishing, and the amount outstanding of CP and corporate bonds issued has recently been around or slightly above the previous year's level. The year-on-year growth rates of the monetary base and the money stock have been at the 1.0-2.0 percent level. The year-on-year growth rate of banknotes in circulation is at the 3.0-4.0 percent level. As for developments in financial markets, money market conditions continue to be extremely easy, as observed in the undersubscription which occurred repeatedly in funds-supplying operations, as the Bank of Japan continues to provide ample liquidity. In the foreign exchange and capital markets, long-term interest rates have risen compared with last month, while the yen's exchange rate against the U.S. dollar and stock prices have been around the same level as last month.