Monthly Report of Recent Economic and Financial Developments

(English translation prepared by the Bank's staff based on the Japanese original)

June 13, 2008
Bank of Japan

Japan's economic growth is slowing, mainly due to the effects of high energy and materials prices.

Exports have continued to increase, although the pace of increase has somewhat slowed lately. Corporate profits have been decreasing recently, mainly due to the deterioration in the terms of trade. In this situation, the pace of increase in business fixed investment has become slower. Private consumption has been firm in a situation where household income has continued rising moderately. On the other hand, public investment has been sluggish. Meanwhile, housing investment has been recovering moderately. With these developments in demand both at home and abroad, production has been more or less flat.

Japan's economy is expected to grow at a slower pace for the time being and follow a moderate growth path thereafter.

Exports are expected to continue rising, as overseas economies are likely to expand although at a slower pace. Corporate profits are expected to continue decreasing for the time being, but return to an upward trend thereafter as the rise in energy and materials prices moderates. Household income is expected to continue rising moderately. Under these circumstances, business fixed investment and private consumption are likely to remain firm. On the other hand, the process of recovery in housing investment is expected to gradually come to an end. Public investment is projected to be on a downtrend. In light of these overall developments in demand, production is expected to increase, after being more or less flat in the short run. Due attention should continue to be paid to factors such as uncertainties regarding future developments in overseas economies and global financial markets, as well as the effects of high energy and materials prices.

On the price front, the three-month rate of change in domestic corporate goods prices has been positive, mainly due to the rise in international commodity prices. The year-on-year rate of increase in consumer prices (excluding fresh food) has been around 1 percent against the background of the increase in prices of petroleum products and food products.

Domestic corporate goods prices are likely to continue increasing for the time being, primarily reflecting the rise in international commodity prices. The year-on-year rate of change in consumer prices is projected to continue to be positive due to the rise in prices of petroleum products and food products in a situation where overall supply and demand in the economy are more or less balanced.

As for the financial environment, the environment for corporate finance is accommodative. Credit demand in the private sector has been increasing moderately. The issuing environment for CP and corporate bonds has been favorable as a whole, although issuance spreads on those issued by firms with low credit ratings have remained relatively high. Lending attitudes of private banks have continued to be generally accommodative. Under these circumstances, the amount outstanding of lending by private banks has been increasing, and the amount outstanding of CP and corporate bonds issued has been above the previous year's level. Funding costs for firms have been more or less unchanged. The financial positions of firms have continued to be favorable as a whole, although those of small and medium-sized firms have somewhat deteriorated. Meanwhile, the year-on-year rate of change in the money stock (M2) is around 2 percent.

As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.5 percent, and interest rates on term instruments have been around the same level as last month. In the foreign exchange and capital markets, long-term interest rates have risen compared with last month, while the yen has depreciated against the U.S. dollar. Meanwhile, stock prices have been around the same level as last month.