Monthly Report of Recent Economic and Financial Developments 1 October 2008 (Summary)
(English translation prepared by the Bank's staff based on the Japanese original)
- This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on October 6 and 7, 2008.
October 8, 2008
Bank of Japan
Japan's economic growth has been sluggish due to the effects of earlier increases in energy and materials prices and weaker growth in exports.
The pace of increase in exports has slowed. Corporate profits have continued to decrease mainly due to the deterioration in the terms of trade, and business sentiment has become even more cautious. In this situation, business fixed investment has declined. Private consumption has been relatively weak, mainly due to sluggish growth in household income and the increase in prices of energy and food. Housing investment has been more or less flat. Public investment, meanwhile, has been sluggish. With these developments in demand both at home and abroad, production has been relatively weak.
Japan's economic growth will likely remain sluggish for the time being as a slowdown in overseas economies becomes more evident. Although there are substantial uncertainties, the economy, in the longer run, is expected to return gradually onto a moderate growth path as the effects of earlier increases in energy and materials prices abate and overseas economies move out of their deceleration phase.
Exports are expected to remain more or less flat for the time being as a slowdown in overseas economies becomes more evident. Domestic private demand is likely to remain relatively weak, due to the decrease in corporate profits and real household income. Public investment, meanwhile, is projected to be on a downtrend. In light of these developments in demand, production is expected to remain relatively weak for the time being.
On the price front, the three-month rate of increase in domestic corporate goods prices has declined somewhat, due to the setback in international commodity prices. The year-on-year rate of increase in consumer prices (excluding fresh food) is currently around 2.5 percent against the background of the increase in prices of energy and food.
The pace of increase in domestic corporate goods prices is expected to slow for the time being, mainly due to the setback in international commodity prices. The year-on-year rate of increase in consumer prices is expected to remain at around the current level over the coming months but to moderate gradually thereafter, reflecting developments in prices of energy and food.
The turmoil in global financial markets in the wake of failures and rescues of U.S. and European financial institutions has, to some extent, affected Japan's money markets, although they have remained relatively stable. The weighted average of the overnight call rate has remained at around 0.5 percent. However, the dispersion of the rates at which individual call transactions are made has increased and interbank rates on term instruments have edged up, due to increased risk aversion among market participants. Meanwhile, the yen has appreciated against the U.S. dollar and stock prices have fallen compared with last month. Yields on long-term government bonds have been around the same level as last month.
Japan's financial environment has remained generally accommodative, but the financial positions of small firms and firms in certain industries have shown deterioration.
The overnight call rate, the policy interest rate, has been at a low level relative to the state of economic activity and price developments. In line with this, funding costs for firms have remained more or less flat, at low levels. The funding of firms--large firms in particular--has increased, reflecting an increase in their demand for working capital to cover the rise in materials prices and generally accommodative lending attitudes maintained by financial institutions. However, an increasing number of small firms have reported that their financial positions are weak, and lending attitudes of financial institutions are severe. In addition, certain industries have faced a worsening in funding conditions, as conditions for their bond issuance have deteriorated and financial institutions have become more cautious in extending credit. Since mid-September, credit spreads on CP and corporate bonds have widened and the issuance of corporate bonds has declined. Meanwhile, the year-on-year rate of change in the money stock has been in the range of 2-3 percent.