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Monthly Report of Recent Economic and Financial Developments December 2006 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 December 18 and 19, 2006.
  2. The text of"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on December 18 and 19, 2006.

December 19, 2006
Bank of Japan

Japan's economy is expanding moderately.

Exports have continued to increase, while public investment has been on a downtrend.  Business fixed investment has continued to increase against the background of high corporate profits and favorable business sentiment.  Household income has also continued rising moderately.  In this situation, private consumption has been on an increasing trend, although the pace of increase has been only modest.  Housing investment has been increasing moderately with some fluctuations.  With the rise in demand both at home and abroad, production has also been increasing.

Japan's economy is expected to continue expanding moderately.

Exports are expected to continue rising against the background of the expansion of overseas economies.  Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income.  In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend.  Public investment, meanwhile, is projected to remain on a downtrend. 

On the price front, domestic corporate goods prices have recently been about the same as their levels of three months earlier, due to the drop in crude oil prices.  The year-on-year rate of change in consumer prices (excluding fresh food) has been on a positive trend.   

Domestic corporate goods prices are expected to be somewhat weak or stay flat in the immediate future, since the effects of the drop in crude oil prices still exist.  The year-on-year rate of change in consumer prices is projected to continue to follow a positive trend, as the output gap continues to be positive.

As for the financial environment, the environment for corporate finance is accommodative.  The issuing environment for CP and corporate bonds is favorable.  Also, the lending attitudes of private banks have continued to be accommodative.  Credit demand in the private sector has been increasing.  Under these circumstances, the amount outstanding of lending by private banks has been increasing.  The amount outstanding of CP and corporate bonds issued is slightly below the previous year's level.  Funding costs for firms have risen slightly.  Meanwhile, the year-on-year rate of change in the money stock is at the 0.0-1.0 percent level.  As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.25 percent, and interest rates on term instruments have been around the same level as last month.  In the foreign exchange and capital markets, stock prices have risen compared with last month, while the yen's exchange rate against the U.S. dollar and long-term interest rates have been around the same level as last month.