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Monthly Report of Recent Economic and Financial Developments March 2004 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 March 15 and 16, 2004.
  2. The Bank's view was determined by the Policy Board at the Monetary Policy Meeting held on March 15 and 16, 2004.

March 16, 2004
Bank of Japan

Japan's economy is recovering gradually.

Exports have recently increased substantially, and business fixed investment continues its path of recovery. Reflecting these developments, industrial production has also been increasing. The decline in household income is gradually coming to a halt, and private consumption is currently showing some positive movements. Meanwhile, housing investment remains sluggish and public investment has been declining.

As for the outlook, Japan's economy is anticipated to continue recovering moderately.

Overseas economies are projected to continue growing relatively fast. Based on this projection, it is likely that final demand, particularly exports and business fixed investment, will continue recovering, and that production will also continue increasing. However, excessive debt in the corporate sector and other structural factors still persist, although their impact has been waning. The employment and income situations are unlikely to improve markedly for the time being, as firms are determined to continue restraining their labor costs. Public investment, meanwhile, is projected to be on a downtrend.

On the price front, domestic corporate goods prices have been rising, due mainly to the strengthening of overseas and domestic commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) has been close to zero, while temporary factors such as the rise in rice prices have exerted upward pressure on prices.

Turning to the outlook, domestic corporate goods prices are expected to continue increasing for some time. As for consumer prices, the year-on-year rate of change is likely to be around zero for the time being due partly to the rise in rice prices. However, they are basically projected to continue falling slightly, since the imbalance between supply and demand still remains considerable despite a gradual improvement in it.

As for the financial environment, the environment for corporate finance is becoming somewhat more accommodative on the whole, although it remains 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 attitude of private banks has been slightly more accommodative. The pace of decline in credit demand in the private sector is becoming somewhat moderate. 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. As growth of banknotes in circulation is on a downtrend due mainly to decreasing anxieties about the financial system, the year-on-year growth rate of the monetary base is moving around 15 percent. The year-on-year growth rate of the money stock is at the 1.0-2.0 percent level. As for developments in financial markets, money market conditions continue to be extremely easy, as the Bank of Japan continues to provide ample liquidity. In the foreign exchange and capital markets, while the yen's exchange rate against the U.S. dollar has fallen from the previous month, stock prices have risen. Long-term interest rates are around the same level as last month.