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Monthly Report of Recent Economic and Financial Developments July 2006 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 July 13 and 14, 2006.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on July 13 and 14, 2006.

July 14, 2006
Bank of Japan

Japan's economy is expanding moderately.

Exports have continued to increase, while public investment has been on a downtrend. Business fixed investment has continued to increase against the background of high corporate profits and favorable business sentiment. Household income has also continued rising moderately. In this situation, private consumption has been on an increasing trend. Housing investment has increased moderately. With the rise in demand both at home and abroad, production has also been increasing. Meanwhile, the conditions of persistent excess supply have been dispersed, and the output gap seems to have become positive.

Japan's economy is expected to continue expanding moderately.

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. 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. The year-on-year rate of change in consumer prices (excluding fresh food) has been on a positive trend.

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. The year-on-year rate of change in consumer prices is projected to continue to follow a positive trend, as the output gap continues to be positive.

As for the financial environment, the environment for corporate finance is accommodative. The issuing environment for CP and corporate bonds is favorable. Also, the lending attitude of private banks has continued to be accommodative. Credit demand in the private sector has started increasing. Under these circumstances, the rate of increase in the amount outstanding of lending by private banks is accelerating. The amount outstanding of CP and corporate bonds issued is around the previous year's level. Funding costs for firms have risen slightly. Meanwhile, the year-on-year growth rate of the money stock has been at the 1.0-2.0 percent level. As for developments in financial markets, in the money markets, the overnight call rate has been effectively zero percent under the Bank of Japan's guideline for money market operations. Interest rates on term instruments have risen compared with last month. 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 been around the same level as last month.

Japan's economy is expected to be broadly in line with the outlook presented in theOutlook for Economic Activity and Prices (the Outlook Report) released in April. As for prices, domestic corporate goods prices in fiscal 2006 are expected to deviate above the outlook, reflecting the rise in international commodity prices, primarily in crude oil prices. The rate of increase in fiscal 2007 is projected to be broadly in line with the outlook. Meanwhile, consumer prices are projected to be broadly in line with the outlook.