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Monthly Report of Recent Economic and Financial Developments December 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 December 15 and 16, 2005.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on December 15 and 16, 2005.

December 16, 2005
Bank of Japan

Japan's economy continues to recover.

Exports have continued to increase, and industrial production has also been on an uptrend with some fluctuations. Business fixed investment has continued to increase, as corporate profits have been high and business sentiment has continued to improve. 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 continued to show some strength. 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, such as the excess 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 continued to increase, mainly reflecting the rise in international commodity prices and the depreciation of the yen. The year-on-year rate of change in consumer prices (excluding fresh food), which had been slightly negative thus far, was 0.0 percent in October.

Domestic corporate goods prices are expected to continue increasing for the time being, mainly due to the effects of the rise in international commodity prices and the depreciation of the yen. The year-on-year rate of change in consumer prices is projected to turn slightly positive, as supply-demand conditions continue improving gradually and the effects from the reduction in telephone charges dissipate.

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 very moderate. Under these circumstances, the amount outstanding of lending by private banks has become above 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 rate of the monetary base is at the 1.0-2.0 percent level, and that of the money stock has been around 2.0 percent. The year-on-year growth rate of banknotes in circulation has decreased in reaction to the increased growth rate in November last year due to the introduction of the new series of banknotes. 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, long-term interest rates and stock prices have risen compared with last month.