Japan's economy is picking up mainly due to various policy measures taken at home and abroad, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand.
Exports and production have been increasing. The decline in business fixed investment has been coming to a halt. Private consumption, notably durable goods consumption, is picking up mainly due to policy measures, despite the continued severe employment and income situation. There are some signs that housing investment has stopped decreasing. Meanwhile, public investment has started to level off.
Japan's economic conditions are likely to continue improving, although the pace of improvement is likely to remain moderate for the time being.
The uptrend in exports and production is expected to continue, reflecting continued improvement in overseas economic conditions, although the pace of increase is likely to moderate gradually. Private consumption, notably durable goods consumption, is likely to continue to pick up for the time being mainly due to policy measures, despite the severe employment and income situation. However, business fixed investment is likely to remain more or less unchanged for the time being, with corporate profits remaining at a low level and the sense of excessive capital stock being strong. Meanwhile, public investment is likely to decrease gradually.
On the price front, the three-month rate of change in domestic corporate goods prices has been slightly negative, mainly due to the slack in supply and demand conditions for products. Consumer prices (excluding fresh food) have been declining on a year-on-year basis due to the substantial slack in the economy as a whole, but the pace of decline has been moderating mainly because the effects of fluctuations in the prices of petroleum products have been dissipating.
Despite the persistent slack in supply and demand conditions for products, domestic corporate goods prices are likely to remain more or less unchanged for the time being, as the rise in commodity prices is expected to exert an upward pressure. The year-on-year pace of decline in consumer prices is likely to moderate, mainly because the prices of petroleum products are expected to exert an upward pressure.
The weighted average of the overnight call rate has been at around 0.1 percent, and interest rates on term instruments have remained more or less unchanged. Meanwhile, compared with last month, long-term interest rates have risen, while the yen's exchange rate against the U.S. dollar and stock prices have remained at more or less the same levels.
The financial environment, with some lingering severity, has continued to show signs of improvement.
The overnight call rate has remained at an extremely low level, and the declining trend in firms' funding costs has continued. The stimulative effects from low interest rates are still constrained by the low level of economic activity and corporate profits, but the degree of constraint has begun to moderate. With regard to credit supply, although many firms still see financial institutions' lending attitudes as severe, firms as a whole regard the situation as improving. Issuing conditions for CP and corporate bonds have remained favorable, except for low-rated corporate bonds. 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 turned to a decline on a year-on-year basis, partly due to its high growth a year ago. The amount outstanding of corporate bonds has exceeded the previous year's level, while that of CP has declined. In these circumstances, although many firms, mainly small ones, still see their financial positions as weak, on the whole firms' financial positions have continued to improve. Meanwhile, the year-on-year rate of change in the money stock has been at around 3 percent.
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