The government’s comprehensive economic stimulus package featuring additional public works projects and special tax reductions will probably have only a limited impact on contracted private demand, the Bank of Japan said in a report Tuesday.
According to the central bank’s monthly report on recent economic and financial developments for July, overall economic conditions have deteriorated since its last report in June.
“Although a further deterioration in the economy is expected to cease as the effects of the stimulus package become full scale, the positive influence of the package on private demand will likely be limited,” the bank said in the report. “The economy’s immediate transition to a self-sustained recovery is hardly expected.”
At a news conference later Tuesday, BOJ Gov. Masaru Hayami said the report was a severe assessment of the economy, given the current economic conditions.
“With the government’s stimulus measures, further deterioration of the economy seems to have been averted, but fast self-recovery is hardly expected,” he said regarding the BOJ’s first official assessment of the stimulus package’s efficacy. “Success of these (pump-priming) measures depends on whether they can regain the confidence of companies and households.”
Hayami reiterated that the government should waste no time in implementing urgent reforms of the financial system and revival of business conditions. “Although I am not in a position to comment on politics, whoever succeeds the present administration must tackle these two issues by exerting leadership,” he said. “Unless the whole nation faces this crisis as one, not only other economies in Asia but also the world economy could be affected.”
On the issue of whether the central bank should pursue inflationary monetary policy to help revive the economy, Hayami said the BOJ’s goal was to ensure price stability and strive for an economic situation that is “neither deflationary nor inflationary.”
The report, based on information presented at the BOJ’s monetary policy meeting held Thursday, the central bank’s pessimistic stance on the economy remained unchanged. “Final demand remains weak and production has declined significantly,” it says. “Employment and income conditions continue to deteriorate, and corporate sentiment is weakening further.”
Inventory levels remain high, and the decline in industrial production is accelerating, the report says. As a result, corporate profits have further decreased, and employment and income conditions have conspicuously deteriorated, as seen in the drop in wages below the previous year’s level.
Under these circumstances, measures to stabilize the financial system, as well as their effects on corporate and household sentiment, should be carefully monitored, the report states.
Regarding prices, the report points out that wholesale prices are still falling and that consumer prices have declined slightly below the previous year’s level. Although the recent depreciation of the yen against the dollar has raised import prices, the hike has been offset by falling prices caused by intensified sales competition, the report says.
The report indicates some improvement in financial markets, as stock prices and yields on long-term government bonds have rebounded since mid-June.
“This may be attributed to a slight recovery in market sentiment — although still weak — responding to the announcement of the Comprehensive Plan for Financial Revitalization, the so-called Total Plan, and to the emergence of expectations for permanent tax cuts,” the BOJ said in the report.
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