Monthly Report of Recent Economic and Financial Developments ¹ August 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 August 10 and 11, 2009.

August 12, 2009
Bank of Japan

Japan's economic conditions have stopped worsening.

Public investment has increased. Exports and production have picked up, after falling substantially. On the other hand, business fixed investment has declined substantially, mainly reflecting weak corporate profits. Private consumption has remained generally weak and housing investment has decreased amid the worsening employment and income situation.

Japan's economic conditions are likely to turn upward over time.

Exports and production are expected to continue recovering, mainly due to progress in inventory adjustments both at home and abroad as well as improvement in overseas economic conditions. Public investment is expected to continue increasing. On the other hand, domestic private demand is likely to remain relatively weak with corporate profits and firms' funding conditions remaining severe and a worsening employment and income situation.

On the price front, the three-month rate of change in domestic corporate goods prices has continued to be slightly negative, mainly due to the easing of supply and demand conditions for products. The year-on-year decline in consumer prices (excluding fresh food) has accelerated mainly due to the prices of petroleum products being lower than the high levels of a year earlier, in addition to the substantial slack persisting in the economy as a whole.

Domestic corporate goods prices are likely to continue decreasing gradually for the time being, as supply and demand conditions for products are likely to remain slack. The year-on-year decline in consumer prices is expected to continue accelerating for the time being, mainly due to the prices of petroleum products being lower than the high levels of a year earlier.

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, compared with last month, yields on long-term government bonds and stock prices have risen, while the yen has depreciated against the U.S. dollar.

Financial conditions, while remaining generally tight, have continued to show signs of improvement.

The overnight call rate has remained at an extremely low level, and firms' funding costs have remained more or less unchanged at low levels. However, the stimulative effects from low interest rates have been limited given the low level of economic activity and corporate profits. With regard to credit supply, although many firms still see financial institutions' lending attitudes as severe, firms as a whole regard the situation as improving somewhat. Issuing conditions for CP and corporate bonds, although remaining severe for firms with low credit ratings, have continued to improve on the whole, as reflected in the narrowing of credit spreads and the increase of firms issuing corporate bonds. As for credit demand, firms' demand for working capital and funds for fixed investment has declined, and some firms have reduced on-hand liquidity that they had accumulated. Against such a backdrop, the pace of increase in bank lending has slowed. Issuance of corporate bonds has been at a high level, while that of CP has declined. In these circumstances, firms' financial positions, although many firms still see them as weak, have continued to improve. Meanwhile, the year-on-year rate of change in the money stock has been at around 2.5 percent.