Monthly Report of Recent Economic and Financial Developments ¹ May 2010 (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 May 20 and 21, 2010.

May 24, 2010
Bank of Japan

Japan's economy is starting to recover moderately, induced by improvement in overseas economic conditions.

Exports and production have been increasing. In these circumstances, business fixed investment is showing signs of picking up. Private consumption, notably durable goods consumption, is picking up partly due to policy measures. Housing investment has leveled out. Meanwhile, public investment is declining.

Japan's economy is likely to recover moderately.

The uptrend in exports and production is expected to continue, reflecting continued improvement in overseas economic conditions, although the pace of increase is likely to moderate gradually. Domestic private demand is expected to continue improving, but the pace of improvement is likely to remain moderate for the time being amid the strong sense among firms of excessive capital stock and employment. Meanwhile, the decline in public investment is likely to continue.

On the price front, the three-month rate of change in domestic corporate goods prices is rising moderately, reflecting the increase in commodity prices, in spite of the persistent slack in supply and demand conditions for products. Consumer prices (excluding fresh food) are declining on a year-on-year basis due to the substantial slack in the economy as a whole, but the moderating trend in the pace of decline has continued.

Domestic corporate goods prices are likely to continue rising moderately for the time being. The year-on-year pace of decline in consumer prices is expected to slow as a trend as the aggregate supply and demand balance improves gradually.

The weighted average of the overnight call rate has been at around 0.1 percent, and interest rates on term instruments have been more or less unchanged. Meanwhile, compared with last month, the yen has appreciated against the U.S. dollar, while long-term interest rates and stock prices have declined.

Financial conditions, with some lingering severity, have continued to show signs of easing.

The overnight call rate has remained at an extremely low level, and the declining trend in firms' funding costs has continued. With economic activity and corporate profits at current levels, the stimulative effects from low interest rates are still partly constrained, but the degree of constraint has decreased mainly due to the improvement in corporate profits. With regard to credit supply, although many firms still see financial institutions' lending attitudes as severe, firms as a whole regard the situation as improving. Issuing conditions for CP and corporate bonds have remained favorable, and even those for low-rated corporate bonds have shown signs of improvement. As for credit demand, firms' need to fund working capital and fixed investment has declined, and some firms have reduced the on-hand liquidity that they had accumulated. Against this backdrop, bank lending has declined on a year-on-year basis, partly due to its high growth a year ago. The amount outstanding of corporate bonds has exceeded the previous year's level, while that of CP has declined. In these circumstances, although many small firms still see their financial positions as weak, on the whole financial positions of firms, including small ones, have continued to show signs of easing. Meanwhile, the year-on-year rate of change in the money stock has been at around 3 percent.