Monthly Report of Recent Economic and Financial Developments ¹ November 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 November 20 and 21, 2008.

November 25, 2008
Bank of Japan

Japan's economic activity has been increasingly sluggish due to the effects of earlier increases in energy and materials prices and the decrease in exports.

Exports have decreased. Business fixed investment has also declined, mainly due to the deterioration in corporate profits. Private consumption has been relatively weak, mainly due to sluggish growth in household income and the increase in prices of energy and food. Housing investment has been more or less flat. Public investment, meanwhile, has been sluggish. Reflecting these developments in demand both at home and abroad, production has continued to decrease.

The increased sluggishness in Japan's economic activity will likely persist over the next several quarters as the slowdown in overseas economies becomes more evident.

Exports are expected to continue decreasing due to the slowdown in overseas economies and the appreciation of the yen. Domestic private demand is likely to remain relatively weak, due to the decrease in corporate profits and real household income. Public investment, meanwhile, is projected to be on a downtrend. With these developments in demand, it is likely that production will continue decreasing and the pace of decrease will be faster in the immediate future.

On the price front, the three-month rate of change in domestic corporate goods prices has become negative, mainly due to the setback in international commodity prices. The year-on-year rate of increase in consumer prices (excluding fresh food) is currently around 2.5 percent against the background of the increase in prices of energy and food.

Looking at price developments for the time being, domestic corporate goods prices are likely to continue decreasing, mainly due to the setback in international commodity prices. The year-on-year rate of increase in consumer prices is expected to moderate reflecting the declines in the prices of petroleum products and stabilization in the prices of food.

In the midst of the ongoing turmoil in global financial markets, the yen appreciated rapidly and stock prices plunged toward the end of last month. Since then, the yen has depreciated and stock prices have recovered slightly, but they have continued to be volatile. In money markets, since the Bank of Japan changed the guideline for money market operations, the weighted average of the overnight call rate has remained at around 0.3 percent. However, interbank rates on term instruments and JGB repo market rates have remained high, indicating increased risk aversion among market participants. Meanwhile, yields on long-term government bonds have been around the same level as last month.

Financial conditions in Japan have become less accommodative on the whole, as the financial positions of small firms have deteriorated and an increasing number of large firms have faced a worsening in funding conditions in the markets.

The overnight call rate has been at a low level relative to the state of economic activity and price developments. However, funding conditions in the markets have deteriorated, as suggested by the fact that credit spreads on CP and corporate bonds have widened and an increasing number of firms have postponed issuing them. As a result, the amount outstanding of CP and corporate bonds issued has fallen below the previous year's level. Large firms have increased their borrowing from banks to cover the decline in the issuance of CP and corporate bonds, although credit demand for working capital has stopped increasing due to the drop in materials prices. As for small firms, an increasing number of these firms have reported that their financial positions are weak and lending attitudes of financial institutions are severe. This relates to the expansion in the year-on-year rate of decline in the amount outstanding of lending to them. Meanwhile, the money stock has increased by around 2 percent from a year earlier.