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Monthly Report of Recent Economic and Financial Developments June 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 June 14 and 15, 2005.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on June 14 and 15, 2005.

June 15, 2005
Bank of Japan

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

Although the momentum of growth in exports remains weak, industrial production is increasing gradually as inventory adjustments in the IT-related sectors are progressing. Business fixed investment has been increasing, reflecting high corporate profits. Household income is rising, albeit moderately, as the employment situation has been improving and wages have stopped declining. In this situation, private consumption has been steady. Meanwhile, housing investment has been nearly flat, and public investment has basically been 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. Although firms are likely to maintain a cautious stance so as to keep their labor costs restrained, household income is expected to continue increasing 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 increased substantially, mainly reflecting the effects of 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, but the rate of growth is expected to slow. On the other hand, 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 is around the previous year's level. The year-on-year growth rate of the monetary base is around 2.0 percent, and that of the money stock is at the 1.0-2.0 percent level. The year-on-year growth rate of banknotes in circulation is 4.0 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 fallen compared with last month, while long-term interest rates and stock prices have been around the same level as last month.