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

December 21, 2009
Bank of Japan

Japan's economy is picking up mainly due to various policy measures taken at home and abroad, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand.

Exports and production have been increasing. Business sentiment, especially at large manufacturing firms, has been improving moderately. The decline in business fixed investment has been coming to a halt. Private consumption, notably durable goods consumption, is picking up mainly due to policy measures, despite the continued severe employment and income situation. Meanwhile, public investment has started to level off and housing investment has decreased.

Japan's economic conditions are likely to continue improving, although the pace of improvement is likely to remain moderate for the time being.

The uptrend in exports and production is expected to continue, reflecting continued improvement in overseas economic conditions, although the pace of increase is likely to moderate gradually. Private consumption, notably durable goods consumption, is likely to continue to pick up for the time being mainly due to policy measures, despite the severe employment and income situation. However, business fixed investment is likely to remain more or less unchanged for the time being, with corporate profits remaining at a low level and the sense of excessive capital stock being strong. Meanwhile, public investment is likely to decrease gradually.

On the price front, the three-month rate of change in domestic corporate goods prices has been slightly negative, mainly due to the slack in supply and demand conditions for products. The year-on-year rate of change in consumer prices (excluding fresh food) has declined, mainly due to the prices of petroleum products, which are lower than their high levels a year ago, in addition to the substantial slack persisting in the economy as a whole.

Domestic corporate goods prices are likely to be soft for the time being due to the persistent slack in supply and demand conditions for products, although the rise in commodity prices is expected to exert an upward pressure. The year-on-year pace of decline in consumer prices is expected to moderate as the effects of the prices of petroleum products abate.

The weighted average of the overnight call rate has been at around 0.1 percent. Interest rates on term instruments have declined somewhat. Meanwhile, compared with last month, stock prices have risen, while the yen's exchange rate against the U.S. dollar and long-term interest rates have remained at more or less the same levels.

The financial environment, with some lingering severity, has continued to show signs of improvement.

The overnight call rate has remained at an extremely low level, and firms' funding costs have declined somewhat. The stimulative effects from low interest rates are still constrained given the low level of economic activity and corporate profits, but the degree of constraint has begun to moderate. 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. Issuing conditions for CP and corporate bonds have remained favorable, except for low-rated corporate bonds. As for credit demand, firms' need to fund working capital and fixed investment has declined, and some firms have reduced the on-hand liquidity that they had accumulated. Against this backdrop, the year-on-year rate of increase in bank lending has declined, partly due to its high growth a year ago. The amount outstanding of corporate bonds has exceeded the previous year's level, while that of CP has declined. In these circumstances, although many firms, mainly small ones, still see their financial positions as weak, on the whole firms' financial positions have continued to improve. Meanwhile, the year-on-year rate of change in the money stock has been in the range of 3.0-3.5 percent.