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Monthly Report of Recent Economic and Financial Developments July 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 July 12 and 13, 2005.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on July 12 and 13, 2005.

July 13, 2005
Bank of Japan

Japan's economy continues to recover, albeit with adjustments in IT-related sectors.

Although the momentum of growth in exports remains weak, industrial production is on a gradual uptrend as inventory adjustments in the IT-related sectors are progressing. Business fixed investment has continued to increase, as corporate profits have remained high and business sentiment has shown improvement again. Household income has been 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.

Growth in exports is expected to accelerate gradually, as overseas economies continue to expand. Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income, while structural adjustment pressure stemming from firms' excess capacity and debt has almost dissipated. In light of these increases in demand both at home and abroad, as well as the progress of adjustments in the IT-related sectors, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to remain basically on a downtrend.

On the price front, domestic corporate goods prices have increased, mainly reflecting the effects of the rise in crude oil prices. Consumer prices (excluding fresh food) have basically 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 on an increasing trend, but the rate of growth is expected to slow for the time being. On the other hand, consumer prices are projected to continue falling slightly on a year-on-year basis for the time being, partly reflecting the effects from the reduction in electricity and telephone charges, although supply and demand conditions are likely to continue improving gradually.

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 has recently been around or slightly above the previous year's level. The year-on-year growth rate of the monetary base and that of the money stock are at the 1.0-2.0 percent level. The year-on-year growth rate of banknotes in circulation is at the 3.0-4.0 percent level. As for developments in financial markets, money market conditions continue to be extremely easy, as observed in the undersubscription which occurred repeatedly in funds-supplying operations, 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.

Japan's economy has broadly been in line with the outlook presented in theOutlook for Economic Activity and Prices (the Outlook Report) released in April; while exports, particularly to China, have deviated slightly below the outlook, domestic private demand has deviated slightly above it. Looking ahead, the economy is expected to be broadly in line with the outlook. Factors for positive and negative deviations continue to be the developments in energy and materials prices, the developments in the U.S. and Chinese economies, as well as the developments in domestic private demand. As for prices, domestic corporate goods prices in fiscal 2005 are expected to deviate above the outlook reflecting the rise in crude oil prices. The rate of increase in fiscal 2006 is expected to be broadly in line with the outlook, although this depends on commodity prices both at home and abroad. Meanwhile, consumer prices in fiscal 2005 and fiscal 2006 are both expected to be broadly in line with the outlook.