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Monthly Report of Recent Economic and Financial Developments May 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 May 19 and 20, 2005.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on May 19 and 20, 2005.

May 20, 2005
Bank of Japan

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

Exports are starting to pick up, and industrial production is increasing gradually as inventory adjustments are progressing in IT-related sectors. Business fixed investment has been on a rising trend, mainly in manufacturing, reflecting high corporate profits. 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 be on a rising trend, as overseas economies continue to expand and domestic demand continues to increase, and the effects of adjustments in IT-related sectors diminish. 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 firms' perception that they have excess labor has almost dissipated and corporate profits continue to be high. 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 increased substantially, mainly due to the rise in crude oil prices. 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 continue increasing for the time being, although at a slower pace. 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. The pace of decline in credit demand in the private sector is becoming somewhat moderate. Under these circumstances, the rate of decline in lending by private banks has been diminishing at a moderate pace, and 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 3.0 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 is at the 4.0-5.0 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 stock prices have fallen compared with last month. Meanwhile, the yen's exchange rate against the U.S. dollar has been around the same level as last month.