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Monthly Report of Recent Economic and Financial Developments October 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 October 11 and 12, 2005.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on October 11 and 12, 2005.

October 12, 2005
Bank of Japan

Japan's economy continues to recover.

Exports have continued to increase moderately, and industrial production has also been on an uptrend with some fluctuations. Business fixed investment has continued to increase against the background of high corporate profits and a modest improvement in business sentiment. Household income has also continued rising moderately, reflecting the improvement in employment and wages. In this situation, private consumption has been steady. Housing investment has recently shown some increases. Meanwhile, public investment has basically been on a downtrend.

Japan's economy is expected to continue to recover.

Exports are expected to continue rising against the background of the expansion of overseas economies. 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 the excess capacity and debt of firms has almost dissipated. In light of these increases in demand both at home and abroad, 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 expected to continue increasing, mainly due to high crude oil prices. Meanwhile, the year-on-year rate of change in consumer prices is projected to be 0.0 percent or a slight increase toward the end of the year. This is because the negative contribution of rice prices is likely to dissipate and the effects from the reduction in electricity and telephone charges are expected to ease, in a situation where supply and demand conditions 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 amount outstanding of lending by private banks is around the previous year's level, and that of CP and corporate bonds issued has been above the previous year's level. The year-on-year growth rates of the monetary base and the money stock are at the 1.0-2.0 percent level. 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, long-term interest rates and stock prices have risen compared with last month, while the yen's exchange rate against the U.S. dollar has fallen compared with last month.