## Bank of Japan's monthly report of recent economic and financial developments 1
Bank of Japan, Communication, 16/02/99.
The Bank's View 2
The economic deterioration in Japan has become moderate against the background o increase in public investment.
Business fixed investment has been declining significantly. As for housing inv housing starts are bottoming out but remain at a low level. Recovery in private con has been weak on the whole, although partial improvement in sales of goods has observed. Meanwhile, net exports (exports minus imports) basically remain on a gr increasing trend, and public investment is increasing considerably. Reflect development of final demand and the continued progress in inventory adjustments, in production, which had been on a downtrend, is leveling off.
Corporate profits continue to decline. Employment and household income conditions ar deteriorating as the unemployment rate is at a historically high level, and winter b decreased significantly. Conditions in corporate finance are currently improving, apparently cannot remove their anxiety about the availability of funds in th Consequently, corporate and household sentiment remains cautious, and a recovery h yet been observed in private demand.
As for the future developments, the increase in public investment is likely to un economy toward the first half of fiscal 1999 with the implementation of the gover economic measures. Furthermore, the Bank's monetary and financial measures and government's measures to alleviate the credit crunch will continue to be in Nevertheless, an immediate self-sustained recovery in private demand is hardly ex since corporate profits and household income are still deteriorating and the constr corporate finance are likely to persist for some time due to cautious lending a private banks. Moreover, attention should be paid to (1) the effects of the appreciation of the yen since autumn 1998; (2) those of the recent rise in long-te rates; and (3) the uncertainty in financial and economic developments abroad. To lea economy into a steady recovery, it is important to prepare an environment where fi households can regain confidence in Japan's economic future by, for instance, p restoring the stability of the financial system.
With regard to prices, reflecting the large output gap, domestic wholesale prices downtrend, and corporate service prices are weakening. Consumer prices have incr above the previous year's level due to the rise in prices of perishables. Excl temporary effect, consumer prices basically remain weak. As for the outlook, althoug investment is expected to increase, distinct narrowing in the output gap is hardl toward the first half of 1999, as private demand is likely to remain sluggish. Furth decline in wages and the appreciation of the yen since autumn 1998 are likely to exerting downward pressure on prices. Hence, prices are expected to remain on a downt
1 This report was written based on data and information available when the Bank of Japan Monetar Meeting was held on February 12, 1999.
2 The Bank's view on recent economic and financial developments, determined by the Policy Board Monetary Policy Meeting held on February 12, as the basis of monetary policy decisions.
In the financial markets, the Japan premium and Euro-yen interest rates (both on three-m contracts) remain stable despite the approach of the fiscal year-end. This reflect abatement of the market's anxiety about liquidity and credit risks of Japanese banks ag the background of the Bank of Japan's maintenance of a decisive stance on easy monetar policy as well as the formulation of the framework to restore the stability of Japan's f system.
Yields on Japanese government bonds have risen again reflecting the market's concern ov the prospective expansion of fiscal deficits. In the foreign exchange market, the trend h toward a higher yen. Stock prices continue to be weak. Considering that these developme can be a hindrance to an economic recovery, their ensuing developments require clos attention.
With regard to corporate finance, credit demand for economic activities remains weak, a result of the significant decrease in business fixed investment. Firms' moves to increas on-hand liquidity in the face of difficult fund-raising conditions are gradually settli Although private banks have basically retained their cautious lending stance, they contin actively utilize the credit guarantee system. As a result, the previously tightened conditions are easing somewhat.
Nevertheless, private banks and capital market participants are still cautious of cor credit risk, and thus firms with relatively low credit ratings remain under severe fundconditions.
The situation continues to warrant careful monitoring, particularly with regard to corporate finance develops toward the end of the fiscal year.