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Monthly Report of Recent Economic and Financial Developments July 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 July 12 and 13, 2004.
  2. The Bank's view was determined by the Policy Board at the Monetary Policy Meeting held on July 12 and 13, 2004.

July 13, 2004
Bank of Japan

Japan's economy continues to recover, with the increases in production and corporate profits exerting positive effects on employment.

Exports and business fixed investment continue to increase, and industrial production has also been increasing consistently. Corporate profits and business sentiment also continue to improve in a broad range of industries. Under these circumstances, the employment situation has been improving, and the decline in household income is coming to a halt. Private consumption continues to show some positive movements. Meanwhile, housing investment has been nearly flat, and public investment has been declining.

Japan's economy is expected to continue to recover, gathering stronger momentum.

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 to recover, and that production will also continue to increase. The impact of excessive debt in the corporate sector and other structural factors on corporate activity is weakening. Although firms are still restraining their labor costs, the positive effects of the increases in production and corporate profits on household income are expected to become visible. Public investment, meanwhile, is projected to be on a downtrend.

On the price front, domestic corporate goods prices have been rising, due to the strengthening of commodity prices at home and abroad and to the improvement in supply and demand conditions. Consumer prices (excluding fresh food) have been declining slightly on a year-on-year basis.

Domestic corporate goods prices are expected to continue increasing for some time, partly due to the rise in crude oil prices. On the other hand, supply and demand conditions are likely to remain loose for the time being, although they are improving. Under these circumstances, consumer prices are projected to basically continue falling slightly on a year-on-year basis.

As for the financial environment, the environment for corporate finance is becoming 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. Also, the lending attitude of private banks is becoming more accommodative. The lending attitude of financial institutions as perceived by firms has improved more noticeably. 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 has basically been diminishing. As growth of banknotes in circulation is on a downtrend mainly due to decreasing anxieties about the financial system, the year-on-year growth rate of the monetary base is at the 4.0-5.0 percent level. The year-on-year growth rate of the money stock is around 2.0 percent. 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, the yen's exchange rate against the U.S. dollar has risen compared with last month, and long-term interest rates and stock prices have been around the same level as last month.

Japan's economy is expected to deviate above the forecasts for fiscal 2004 presented in the"Outlook for Economic Activity and Prices" (the Outlook Report) released in April 2004. Final demand, particularly exports and business fixed investment, has been recovering, and the increase in production is exerting positive effects on employment. Hence, Japan's economy is expected to gather stronger momentum. As for prices, domestic corporate goods prices are expected to deviate above the forecasts for fiscal 2004 of April, reflecting the strengthening of commodity prices, such as crude oil prices, at home and abroad and the improvement in supply and demand conditions. The impact of the rise in domestic corporate goods prices, which needs close monitoring, is likely to be largely absorbed by factors such as higher productivity in the corporate sector, as the price rise is passed on to the prices of intermediate goods and final goods. Hence, consumer prices are projected to basically continue a slight decline, broadly in line with the forecasts for fiscal 2004 of April.