(BOJ) Monthly Report of Recent Economic and Financial Developments March 2008 (The Bank's View)

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 March 6 and 7, 2008.

2 The text of "The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on March 6 and 7, 2008.

March 7, 2008

Bank of Japan

Japan's economy is expanding moderately as a trend, although the pace of growth has been slowing mainly due to the drop in housing investment and the effects of high energy and materials prices.

Exports have continued to increase. Business fixed investment has also continued to trend upward, as corporate profits have remained high although they are leveling off. Private consumption has been firm in a situation where household income has continued rising moderately. Meanwhile, public investment has been sluggish. Housing investment has remained at a low level, although there have been signs of recovery. With these developments in demand both at home and abroad, production has been more or less flat lately, partly in reaction to the relatively large increase in the second half of last year.

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, as overseas economies are likely to expand although at a slower pace. Business fixed investment and private consumption are likely to follow an uptrend against the background of generally 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 developments in demand both at home and abroad, production is expected to increase, after being more or less flat in the short run. Public investment, meanwhile, is projected to be on a downtrend. 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 rising since around the end of last year, due to 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 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.