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Monthly Report of Recent Economic and Financial Developments November 2003 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 November 20 and 21, 2003.
  2. The Bank's view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on November 20 and 21, 2003 as the basis for monetary policy decisions.

November 21, 2003
Bank of Japan

Japan's economy is starting to recover gradually.

Housing investment remains sluggish and public investment is declining. Private consumption also continues to be weak. However, exports are increasing and business fixed investment continues a gradual recovery. Reflecting these developments in final demand, industrial production, which had been flat, has started to increase. Meanwhile, the decline in household income is gradually coming to a halt.

As for the outlook, Japan's economy is anticipated to continue recovering, albeit at a moderate pace.

Overseas economies are projected to continue growing relatively fast. Based on this projection, it is expected that exports and production will continue increasing and that the recovery trend in business fixed investment will also become clearer. However, given persisting structural factors such as excess debt, the increase in business fixed investment is expected to remain moderate. Private consumption is likely to remain weak or virtually flat for some time, since the employment and income situation is unlikely to improve markedly. Meanwhile, public investment is projected to follow a declining trend.

On the price front, domestic corporate goods prices continue to be more or less flat, since the decline in machinery prices was almost offset by the rise in rice prices. Meanwhile, the year-on-year rate of decline in consumer prices has diminished due mainly to the temporary factors such as the increase in medical treatment costs and in tobacco tax. The decline was 0.1 percent in September. As for the outlook, domestic corporate goods prices are likely to remain more or less flat for the time being. As for consumer prices, the year-on-year rate of change may temporarily be zero percent or slightly above due to the rise in rice prices. However, they are basically projected to continue falling gradually, since the imbalance between supply and demand in the economy still remains considerably large despite its gradual improvement.

As for the financial environment, money market conditions continue to be extremely easy, as the Bank of Japan provides ample liquidity. In the foreign exchange and capital markets, the yen's exchange rate to the U.S. dollar and stock prices show somewhat unstable movements. Meanwhile, long-term interest rates are declining. The environment for corporate finance is becoming somewhat more accommodative on the whole, although it is still severe for firms with high credit risks. The issuing environment for CP and corporate bonds is favorable on the whole, especially for firms with high credit ratings. Also, the lending attitudes of private banks have been slightly more accommodative in areas such as terms and conditions for loans. Under these circumstances, the amount outstanding of CP and corporate bonds issued continues to be above the previous year's level, and the rate of decline in lending by private banks is diminishing slightly. Meanwhile, the year-on-year growth rate of the money stock is on the 1.0-2.0 percent level.