(English translation prepared by the Bank's staff based on the Japanese original)
February 16, 2011
Bank of Japan
Monthly Report of Recent Economic and Financial Developments1
February 2011
Summary
Japan's economy is gradually emerging from the current deceleration phase.
Exports and production are showing signs of resuming an uptrend. Business fixed investment has started to pick up. The employment and income situation has remained severe, but the degree of severity has eased somewhat. As for private consumption, demand for some goods has suffered a reverse after the sharp increase seen previously. Housing investment has started to pick up. On the other hand, public investment is declining.
Japan's economy is expected to emerge from the current deceleration phase and return to a moderate recovery path.
Exports are expected to increase moderately, reflecting the improvement in overseas economic conditions. Private consumption is expected to pick up again as the reverse following the sharp increase in demand becomes less pronounced. Meanwhile, signs of picking up in business fixed investment are expected to gradually become more evident as the improvement in corporate profits continues. However, with firms' persistent sense of excessive capital stock, the pace of improvement in business fixed investment is likely to remain moderate. In these circumstances, production is expected to increase modestly.
On the price front, the three-month rate of change in domestic corporate goods prices is rising, mainly due to the increase in international commodity prices. The year-on-year rate of decline in consumer prices (excluding fresh food) has continued to slow as a trend, while the substantial slack remains in the economy as a whole.
1 This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on February 14 and 15, 2011.
1
Domestic corporate goods prices are expected to continue rising for the time being, reflecting movements in international commodity prices. The year-on-year rate of decline in consumer prices is expected to slow as a trend as the aggregate supply and demand balance improves gradually.
The weighted average of the overnight call rate has generally been slightly below the 0.1 percent level, and interest rates on term instruments have been more or less unchanged. Meanwhile, the value of the yen against the U.S. dollar, long-term interest rates, and stock prices have remained at more or less the same levels as last month.
Financial conditions have continued to ease further.
The overnight call rate has remained at an extremely low level, and the declining trend in firms' funding costs has continued. While stimulative effects from low interest rates are still partly constrained given current developments in economic activity and prices, such effects are beginning to strengthen in light of improved corporate profits. With regard to credit supply, firms have continued to see financial institutions' lending attitudes as improving. Issuing conditions for CP and corporate bonds have become more favorable as seen in an increased variety of corporate bond issuers. 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, bank lending has declined on a year-on-year basis. On the other hand, the amount outstanding of corporate bonds has exceeded the previous year's level, and the pace of decline in the amount outstanding of CP has been on a decelerating trend. In these circumstances, the financial positions of firms have been improving as a whole. Meanwhile, the year-on-year rate of change in the money stock has been in the range of 2.0-2.5 percent.