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Monthly Report of Recent Economic and Financial Developments 1 January 2009 (Summary)

(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 January 21 and 22, 2009.

January 23, 2009
Bank of Japan

Japan's economic conditions have been deteriorating significantly.

Exports have decreased substantially. Corporate profits have continued to deteriorate, and business fixed investment has declined substantially. Private consumption has weakened, as the employment and income situation has become increasingly severe. As for housing investment, the number of housing starts has started to decrease again. Public investment, meanwhile, has been sluggish. Reflecting these developments in demand both at home and abroad, production has decreased at a much faster pace.

Japan's economic conditions are likely to continue deteriorating for the time being.

Exports are expected to continue to decrease due to the slowdown in overseas economies and the appreciation of the yen. Domestic private demand is also likely to weaken further as corporate profits and firms' funding conditions deteriorate and the employment and income situation becomes increasingly severe. Public investment, meanwhile, is projected to be sluggish. Reflecting these developments in demand and growing adjustment pressures on inventories, production is expected to continue to decrease.

On the price front, the three-month rate of decrease in domestic corporate goods prices has been large, mainly due to the drop in international commodity prices. The year-on-year rate of increase in consumer prices (excluding fresh food) has moderated, mainly reflecting the declines in the prices of petroleum products and the stabilization of food prices.

Domestic corporate goods prices are likely to continue decreasing for the time being, mainly due to the drop in international commodity prices and the easing of supply-demand conditions for products. The year-on-year rate of increase in consumer prices is expected to moderate further and become negative, mainly due to the declines in the prices of petroleum products and the stabilization of food prices and also to increasing slackness in supply and demand conditions in the overall economy.

In money markets, the weighted average of the overnight call rate has been at around 0.1 percent since the Bank of Japan changed the guideline for money market operations. JGB repo market rates have declined, due partly to the reduction in the policy interest rate and a drop in seasonal demand for funds over the year-end. Against the background of these factors and various policy measures, CP rates, which rose sharply in the previous few months, have also declined somewhat since the end of last year. Interbank rates on term instruments, however, have remained at high levels. Meanwhile, stock prices have fallen compared with last month, whereas the yen's exchange rate against the U.S. dollar and yields on long-term government bonds have been around the same level as last month.

Financial conditions in Japan have become tighter.

The overnight call rate has been at an extremely low level, but the stimulative effects from this have become increasingly limited given the significant deterioration in economic activity. Despite a slight decline in bank lending rates following the reduction in the policy interest rate, funding costs for firms have been more or less flat as a whole, as credit spreads on CP and corporate bonds have remained wide. The amount outstanding of CP and corporate bonds issued has been below the previous year's level, as investors have continued to be selective in their purchases of CP and corporate bonds. The amount outstanding of bank lending, especially to large firms, has increased at a faster pace, reflecting firms' demand for securing more liquidity and compensating for the decline in the issuance of CP and corporate bonds. Despite the increase in bank lending, an increasing number of firms have reported that their financial positions are weak and lending attitudes of financial institutions are severe. Meanwhile, the year-on-year rate of change in the money stock has been around 2 percent.