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Monthly Report of Recent Economic and Financial Developments April 2005 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 April 5 and 6, 2005.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on April 5 and 6, 2005.

April 6, 2005
Bank of Japan

Japan's economy continues a recovery trend, albeit with adjustments in IT-related sectors.

Although exports are starting to pick up, industrial production has been more or less flat due to the ongoing inventory adjustments in IT-related sectors. Business sentiment seems to have become somewhat cautious. On the other hand, business fixed investment has been on a rising trend, mainly in manufacturing, as corporate profits have been on an improving trend. The employment situation has also been on an improving trend and household income has clearly stopped declining. In this situation, private consumption has been steady. Meanwhile, housing investment has been nearly flat, and public investment has been basically on a downtrend.

Japan's economy is expected to continue to recover.

Exports and production are expected to increase as the effects of adjustments in IT-related sectors weaken, while overseas economies continue to expand and domestic demand also continues to increase. Structural adjustment pressure stemming from firms' excess capacity and debt has been easing. While firms are likely to continue restraining labor costs, household income is expected to increase gradually as corporate profits continue to increase and firms' perception of excess labor dissipates. Public investment, meanwhile, is projected to be basically on a downtrend.

Developments in IT-related demand and 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 recently been somewhat weak, mainly because crude oil prices fell back temporarily toward the end of last year. Consumer prices (excluding fresh food) have been declining slightly on a year-on-year basis, partly due to the reduction in electricity and telephone charges.

Domestic corporate goods prices are likely to increase somewhat, reflecting the rise in commodity prices at home and abroad. Meanwhile, consumer prices are projected to continue falling slightly on a year-on-year basis because supply and demand conditions are likely to remain loose for the time being, although they are improving, and partly because the effects from the reduction in electricity and telephone charges will continue.

As for the financial environment, the environment for corporate finance is becoming more accommodative on the whole. The issuing environment for CP and corporate bonds is favorable. Also, the lending attitude of private banks is becoming more accommodative. The lending attitude of financial institutions as perceived by firms has been improving. Under these circumstances, the rate of decline in lending by private banks has been diminishing at a moderate pace, although the improvement in credit demand in the private sector seems to have stopped temporarily. The amount outstanding of CP and corporate bonds issued continues to be above the previous year's level. The year-on-year growth rate of the monetary base is 2.0 percent. The year-on-year growth rate of the money stock continues to be around 2.0 percent. The year-on-year growth rate of banknotes in circulation has been at the 3.0-4.0 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, long-term interest rates and the yen's exchange rate against the U.S. dollar have fallen compared with last month. Meanwhile, stock prices have been around the same level as last month.