Monthly Report of Recent Economic and Financial Developments ¹ June 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 June 15 and 16, 2009.

June 17, 2009
Bank of Japan

Japan's economic conditions, after deteriorating significantly, have begun to stop worsening.

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 begun to turn upward, after falling substantially. Public investment, meanwhile, has increased.

In the coming months, Japan's economy is likely to show clearer evidence of leveling out over time.

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 continue recovering, mainly due to progress in inventory adjustments both at home and abroad. Public investment, meanwhile, is expected to continue increasing.

On the price front, the three-month rate of change in domestic corporate goods prices has continued to be slightly below 0 percent due to the earlier fall in international commodity prices and the easing of supply-demand conditions for products. The year-on-year rate of change 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 change 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, yields on long-term government bonds and stock prices have risen compared with last month, while the yen has depreciated against the U.S. dollar.

Financial conditions in Japan have generally remained tight, although there have been signs of improvement.

The overnight call rate has remained at an extremely low level. Firms' funding costs have further declined, mainly due to declines in issuance rates on CP and corporate bonds. However, the stimulative effects from low interest rates have been limited given the low level of economic activity and corporate profits. The amount outstanding of bank lending, especially to large firms, has continued to increase at a relatively fast pace, although the pace of increase is somewhat slower than at the end of last year. Funding conditions for CP and corporate bonds have improved further: 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. Many firms have continued to see their financial positions as weak and lending attitudes of financial institutions as severe, although there are indications that firms' financial conditions in terms of these perspectives have stopped tightening. Meanwhile, the year-on-year rate of change in the money stock has been at around 2.5 percent.