Monthly Report of Recent Economic and Financial Developments ¹ March 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 March 17 and 18, 2009.

March 19, 2009
Bank of Japan

Japan's economic conditions have deteriorated significantly.

Exports have decreased substantially. Corporate profits have deteriorated at a faster pace, 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 begun decreasing again. Public investment, meanwhile, has been sluggish. Reflecting these developments in demand both at home and abroad and increased adjustment pressures on inventories, 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 deterioration in overseas economic conditions 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, production is expected to continue to decrease, but the pace of decrease is expected to moderate gradually as adjustment pressures on inventories wane.

On the price front, the three-month rate of change in domestic corporate goods prices has continued to be negative, mainly due to the drop in international commodity prices. The year-on-year rate of increase in consumer prices (excluding fresh food) has declined to 0 percent, 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, as the effects of the drop in international commodity prices are expected to remain and the easing of supply-demand conditions for products will continue. The year-on-year rate of increase in consumer prices is expected to 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.

Japanese stock prices, after declining alongside U.S. and European stock prices, have recently risen to a level higher than last month. The yen has depreciated against the U.S. dollar. Meanwhile, the weighted average of the overnight call rate has remained at around 0.1 percent. Interest rates on term instruments and yields on long-term government bonds have remained more or less unchanged from last month.

Financial conditions in Japan have remained tight.

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. Firms' funding costs have declined compared to the levels at the end of last year, following the reductions in the policy interest rate and improvements in issuance conditions in the CP market. The amount outstanding of CP and corporate bonds issued has been increasing since a while ago, and that of bank lending, especially to large firms, has continued to increase rapidly. However, issuance of corporate bonds by firms with low credit ratings has remained subdued, and an increasing number of firms, especially small 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.