## Bank of Japan's monthly report of recent economic and financial developments /c20 Bank of Japan, Communication, 21/1/99.
The Bank's View /c21 The economic deterioration in Japan is easing gradually mainly due to the increase investment.
With respect to final demand, business fixed investment has been declining significa housing investment continues to be sluggish. Private consumption, as a whole, remains s Meanwhile, net exports (exports minus imports) are basically increasing at a moderate p public investment has turned to follow a distinct upward trend. Reflecting this devel final demand and the progress in inventory adjustments, the decline in production is sl
Corporate profits continue to worsen. Employment and household income conditions h deteriorated as the unemployment rate has reached a new historical high, the ratio of j applications remains at its lowest ever level, and winter bonuses have decreased sig Financial conditions are improving with the effects of the policy measures taken government and the Bank. Nonetheless, firms apparently cannot eliminate their anxiety a availability of funds toward the end of fiscal 1998. Consequently, corporate and h sentiment remains cautious, and a recovery has not yet been observed in private demand.
As for future developments, the increase in public investment is likely to underpin th toward the first half of fiscal 1999 with the implementation of the government's e measures. Furthermore, the Bank's monetary and financial measures and the governme measures to alleviate the credit crunch will remain in effect. Nevertheless, an imme sustained recovery in private demand is hardly expected since corporate profits and h income are deteriorating and the constraints from corporate finance are likely to persi time due to the cautious lending attitudes of private banks. Moreover, attention should the effects of the continued appreciation of the yen since autumn 1998, and to the unc financial and economic developments abroad. To lead Japan's economy into a steady recov is important to prepare an environment where firms and households can regain confide Japan's economic future by, for instance, promptly restoring the stability of the financ
With regard to prices, reflecting the large output gap, domestic wholesale prices downtrend, and corporate service prices are weakening. Consumer prices have increased the previous year's level due to the rise in prices of perishables. Excluding this eff consumer prices basically continue to be weak. As for the outlook, the economic deterio likely to continue easing mainly due to the increase in public investment. Nonetheles narrowing in the output gap is hardly expected for the time being as private demand sluggish. Furthermore, the decline in wages and the appreciation of the yen since aut are likely to continue exerting downward pressure on prices. Hence, the decline in pr somewhat accelerate in the future. In the financial markets, a slight increase was obse Japan premium and Euro-yen interest rates both on three-month contracts, as these c mature beyond the fiscal year-end in March. In general, however, the premium is smaller
1
This report is based on data and information available when the Bank of Japan Monetary Policy M was held on January 19, 1999 .
2 The Bank ' s view on recent economic and financial developments, determined by the Policy Board at Monetary Policy Meeting held on January 19, as the basis of monetary policy decisions .
Euro-yen rates are lower than those on contracts maturing beyond the end of accounting 1998.
Between mid-December and early January, yields on Japanese government bonds rose furthe reveal the market concern over the deterioration in the supply-demand balance due to the massive issuance. Stock prices weakened, reacting to the appreciation of the yen and t the long-term interest rates. Although such movements in these markets appear to have r the ensuing developments and their economic consequences require close attention.
With regard to corporate finance, credit demand for economic activities seems to remai although firms, particularly large ones, are further seeking to secure ample on-hand Meanwhile, private banks are keeping their cautious lending stance as they face the w performance of borrower companies. However, the enhanced credit guarantee system has actively utilized. Such government policy measures and the Bank's new measures to fac firms' financing activities have presumably contributed to easing the once seriously credit conditions.
Nevertheless, firms, especially those with low credit standings, are still subject to raising conditions.
How corporate financing conditions develop and how such developments influence busi activities and the economy as a whole continues to warrant careful monitoring.