The Bank of Japan revised its assessment of the economy slightly upward in its monthly report released Tuesday, saying things appear “to have stopped deteriorating.”
For months the central bank had said the deterioration of the economy “has moderated.” The wording in Tuesday’s report indicates the BOJ has revised its view to take a more upbeat tone.
The BOJ report on the nation’s economic and financial developments for March cites an increase in public investment and inventory adjustments as contributing to the new trend. It said the downward momentum that has long plagued production at manufacturers has — at least for the time being — dissipated.
As for the outlook, the government’s pump-priming measures and the BOJ’s easy monetary policy are expected to underpin the economy, the report says, adding that efforts to resuscitate the financial sector, represented by the public fund injections into 15 banks, will work positively for the economy.
The bank cautioned, however, that ongoing restructuring, especially at large corporations, will curtail equipment investment in the short term. It will also dampen household expenditures as employment and income conditions worsen. “Under such circumstances, it is still difficult to expect an immediate, self-sustained recovery in private demand,” the report says.
On financial conditions, the report notes that its Feb. 12 decision to further ease the money supply has led to lowered interest rates both on overnight call money and term instruments.
Market anxieties about liquidity and credit risks of Japanese banks seem to have subsided, as reflected in a rapid contraction in the “Japan premium,” the added charge Japanese banks pay when borrowing overseas, the report says.
On corporate financing, the BOJ said capital demand for equipment investment remains weak, while private financial institutions maintain a cautious attitude toward lending due to worsening performances at borrower companies. But it claimed firms’ fundraising difficulties are being alleviated, helped by the government-sponsored credit guarantee system.
In a regular news conference later in the day, BOJ Gov. Masaru Hayami said he does not see the need for the central bank to immediately come up with a new target for its easy monetary policy.
The bank decided Feb. 12 to further ease its money supply by guiding down the unsecured overnight call money rate — the key short-term interest rate — to near zero. Some economists have recently argued that the current method of guiding down the call money rate is no longer valid as the rate has virtually hit zero, and that the BOJ should take new steps to ensure an ample supply of funds.
But Hayami said the bank’s mission of guiding the call money rate downward has not been completed. “I think we should not rush (to find a new target),” he said. “We should examine for a little while what happens by guiding the overnight rate to the lowest possible level.”
Hayami also said that the bank should make sure that the nation does not experience stagflation. “One of the most important things in the monetary policy is not to sow the seeds of future inflations,” he said. “It has happened in the past that what the (central bank) has done with good intentions turned out to lead to inflation.”