Monthly Report of Recent Economic and Financial Developments ¹ May 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 May 21 and 22, 2009.

May 25, 2009
Bank of Japan

Japan's economic conditions have been deteriorating, but exports and production are beginning to level out.

Business fixed investment has declined substantially, reflecting the significant deterioration in corporate profits. Private consumption has weakened and housing investment has decreased, as the employment and income situation has become increasingly severe. On the other hand, exports and production have started to level out, after having fallen substantially. Public investment, meanwhile, has begun to turn upward.

The pace of deterioration in Japan's economic conditions is likely to moderate gradually, leading to a leveling out of the economy.

Domestic private demand is likely to continue weakening with corporate profits and firms' funding conditions remaining severe and a worsening employment and income situation. On the other hand, exports and production are expected to level out and start recovering, mainly due to progress in inventory adjustments both at home and abroad. Public investment, meanwhile, is also expected to increase.

On the price front, the three-month rate of change in domestic corporate goods prices has continued to be negative due to the earlier fall in international commodity prices and the easing of supply-demand conditions for products, but the pace of decline has been moderating. The year-on-year rate of increase in consumer prices (excluding fresh food) has declined to around 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 gradually for the time being, as supply-demand conditions for products are likely to remain slack. 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.

The weighted average of the overnight call rate has been at around 0.1 percent, and interest rates on term instruments have remained more or less unchanged. Meanwhile, the yen has appreciated against the U.S. dollar compared with last month, whereas yields on long-term government bonds and stock prices have remained at more or less the same level as last month.

Financial conditions in Japan have remained tight, although there has been some easing of tension compared to some time ago.

The overnight call rate has remained at an extremely low level. It seems that firms' funding costs, after declining at the beginning of this year, have remained more or less unchanged at low levels. However, the stimulative effects from low interest rates have been limited given that economic activity and corporate profits have continued to deteriorate. The amount outstanding of bank lending, especially to large firms, has continued to increase rapidly. Funding conditions for CP and corporate bonds have been improving: the decline in issuance of CP has mainly reflected a weakening of firms' demand for additional liquidity, and an increasing number of firms have been issuing corporate bonds. However, issuance of corporate bonds by firms with low credit ratings has remained subdued, and many firms have continued to see their financial positions as weak and lending attitudes of financial institutions as severe. Meanwhile, the year-on-year rate of change in the money stock has risen to around 2.5 percent.