Monthly Report of Recent Economic and Financial Developments ¹ July 2008 (Summary)

(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 14 and 15, 2008.

July 17, 2008
Bank of Japan

Japan's economic growth is slowing further, mainly due to the effects of high energy and materials prices.

Exports have continued to be on an increasing trend, although the pace of increase has slowed lately. Corporate profits have been decreasing mainly due to the deterioration in the terms of trade, and business sentiment has become more cautious. In this situation, the pace of increase in business fixed investment has become slower. Household income has continued rising moderately, but growth in private consumption has recently been somewhat sluggish against the background of the continued increase in prices mainly of petroleum products and food. The recovery in housing investment has come to a halt. Public investment, meanwhile, has been sluggish. With these developments in demand both at home and abroad, production has recently been somewhat weak.

Japan's economy is expected to grow at a slower pace for the time being and gradually return onto a moderate growth path thereafter.

Exports are expected to stay on an increasing trend, as overseas economies are likely to expand although at a slower pace. Corporate profits are expected to continue decreasing for the time being, but return to an upward trend thereafter as the rise in energy and materials prices moderates. Household income is expected to follow a moderate rising trend. Under these circumstances, growth in domestic private demand is likely to be somewhat sluggish for the time being but gradually gain firmness thereafter. Public investment, meanwhile, is projected to be on a downtrend. In light of these overall developments in demand, production is expected to return to an increasing trend, after being more or less flat in the short run. Due attention should continue to be paid to factors such as uncertainties regarding future developments in overseas economies and global financial markets, as well as the effects of high energy and materials prices.

On the price front, the three-month rate of change in domestic corporate goods prices has been positive, mainly due to the rise in international commodity prices. The year-on-year rate of increase in consumer prices (excluding fresh food) has been around 1.5 percent against the background of the increase in prices of petroleum products and food.

Domestic corporate goods prices are likely to continue increasing for the time being, primarily reflecting the rise in international commodity prices. The year-on-year rate of change in consumer prices is projected to be positive at around the current level or somewhat higher for the time being, due to the rise in prices of petroleum products and food, in a situation where overall supply and demand in the economy are more or less balanced.

As for the financial environment, the environment for corporate finance is accommodative. Credit demand in the private sector has been increasing moderately. The issuing environment for CP and corporate bonds has been favorable as a whole, although issuance spreads on those issued by firms with low credit ratings have remained relatively high. Lending attitudes of private banks have continued to be generally accommodative. Under these circumstances, the amount outstanding of lending by private banks has been increasing, and the amount outstanding of CP and corporate bonds issued has been above the previous year's level. Funding costs for firms remain more or less unchanged. The financial positions of firms have continued to be favorable as a whole, but those of small and medium-sized firms have deteriorated somewhat. Meanwhile, the year-on-year rate of change in the money stock is around 2 percent.

As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.5 percent, and interest rates on term instruments have been around the same level as last month. In the foreign exchange and capital markets, the yen has appreciated against the U.S. dollar compared with last month, while long-term interest rates and stock prices have fallen compared with last month.