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Monthly Report of Recent Economic and Financial Developments October 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 October 12 and 13, 2004.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on October 12 and 13, 2004.

October 13, 2004
Bank of Japan

Japan's economy continues to recover.

Exports and industrial production have been on a rising trend, albeit at a slightly slower pace. Corporate profits and business sentiment continue to improve. Under these circumstances, business fixed investment has also been increasing. The employment situation has been on an improving trend, 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 to expand. Based on this projection, it is likely that exports and domestic demand will continue to increase, and that production will also continue to be on an uptrend. 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, in a situation where the extent of excess labor as perceived by firms has been easing. Public investment, meanwhile, is projected to be on a downtrend.

Developments in crude oil prices and their impact on the domestic as well as overseas economies should continue to be noted.

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 been improving. 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 remains low compared to some time ago mainly due to decreasing anxieties about the financial system, the year-on-year growth rate of the monetary base has been 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, long-term interest rates, and stock prices have been around the same level as last month.