Monthly Report of Recent Economic and Financial Developments

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 January 21 and 22, 2008.
    2 The text of "The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on January 21 and 22, 2008.

January 22, 2008
Bank of Japan

Japan's economy is expanding moderately as a trend, although the pace of growth seems to be slowing mainly due to the drop in housing investment.

Exports and production have continued to increase. Business fixed investment has also continued to trend upward against the background of generally high corporate profits. Private consumption has been firm in a situation where household income has continued rising moderately. Meanwhile, public investment has been sluggish and housing investment has dropped substantially.

Japan's economy is expected to continue expanding moderately, although the pace of growth is likely to slow for the time being.

Exports are expected to continue rising against the background of the expansion of overseas economies as a whole. Business fixed investment and private consumption are likely to follow an uptrend against the background of high corporate profits and the moderate rise in household income. Housing investment is expected to recover gradually, although it is likely to remain sluggish for the time being. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to be on a downtrend.

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 change in consumer prices (excluding fresh food) has become positive.

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 follow a positive trend due to the rise in prices of petroleum products and food products in the short run and the positive output gap in the longer run.

As for the financial environment, the environment for corporate finance is accommodative. Credit demand in the private sector has been more or less flat. 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 expanded slightly. Lending attitudes of private banks have continued to be accommodative. Under these circumstances, the amount outstanding of lending by private banks has been increasing moderately, 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. Meanwhile, the year-on-year rate of change in the money stock 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, the yen has appreciated against the U.S. dollar compared with last month, while long-term interest rates and stock prices have fallen compared with last month.

Developments in Japan's economy have so far deviated somewhat downward from the projection presented in the Outlook for Economic Activity and Prices (the Outlook Report) released in October 2007, mainly due to the protracted decline in housing investment. As a result, the rate of real GDP growth in fiscal 2007 is likely to be slightly lower than the potential growth rate. However, with a virtuous circle of growth in production, income, and spending remaining basically intact, in fiscal 2008 the rate of real GDP growth is likely to be broadly as projected and slightly higher than the potential growth rate, as housing investment is expected to recover gradually. Due attention should be paid to factors that will affect this outlook, such as uncertainties regarding future developments in overseas economies and global financial markets, as well as the effects of high energy and materials prices. As for prices, the rate of increase in domestic corporate goods prices for both fiscal 2007 and 2008 is likely to be higher than the projection in the Outlook Report, mainly due to the rise in international commodity prices. 3 Meanwhile, the rate of increase in consumer prices for fiscal 2007 is likely to be somewhat higher than the projection in the Outlook Report due to the increase in prices of petroleum products and food products. In fiscal 2008, consumer prices are likely to be broadly as projected, since it is likely that the effects of the increase in prices of petroleum products and food products will remain while the effects of a temporary slowdown in the economy will emerge.

3 The base year for the domestic corporate goods price index has been changed from the 2000 base to the 2005 base since the release in December 2007. The year-on-year rate of increase in domestic corporate goods prices forecasted in the Outlook Report is subject to this base-year change, and the extent of a possible downward revision is likely to be about 0.5 percentage point for fiscal 2007 and slightly less than 0.5 percentage point for fiscal 2008.