This is the unedited press release from Bank of Japan


Global financial markets have been unstable due mainly to the downgrading of securitized products and heightened concern about possible further losses at financial institutions stemming from the U.S. subprime mortgage problems. Toward the end of 2007, money markets in the United States and Europe came under pressure from financial institutions'' eagerness to secure year-end funds, and this caused interest rates on term instruments to surge. To address this situation, from the middle of December onward, central banks in the major economies coordinated their implementation of responsive measures such as liquidity provision. As a result, interest rates on term instruments have fallen and money markets are recovering their stability.

On the other hand, the functioning of markets for securitized products, where the problem originated, remains impaired, and stock markets and foreign exchange markets have been volatile globally. Investor risk-aversion persists, and projected losses at financial institutions in the United States and Europe are greater than initially expected. Although financial institutions in these countries have successively announced measures to boost their capital, underwritten with investment from, among others, sovereign wealth funds from emerging economies and oil producing countries, market participants remain circumspect, keeping a weather eye on future disclosures of losses at financial institutions and their measures to compensate for these losses.

The world economy continues to expand as a whole, but the uncertainty regarding its future path is increasing due to the aforementioned volatility in global financial markets. In the United States, an economic slowdown is becoming more evident. Housing investment is down substantially, with the fall in housing sales and the rise in the already-elevated stock of unsold homes continuing unabated. Home prices continue to fall, and there is no indication that the bottom has yet been reached. Moreover, recently released information suggests that employment and production have weakened somewhat and that banks are tightening lending standards not only for housing loans but also for commercial real estate loans, as well as loans to both businesses and consumers. A slowing of the pace of increase in private consumption is becoming somewhat more evident, but the trend remains moderately upward. Business fixed investment, meanwhile, is also continuing its moderate upward trend. In terms of macroeconomic measures to address the situation, the Federal Reserve has been aggressively lowering its policy interest rate, and the U.S. government has decided on a fiscal package to stimulate the economy, including a tax reduction.Although lower growth in the U.S. economy may be unavoidable for the time being, it is likely to return to a path of growth close to potential, as the housing market correction draws to an end, the tightness in financial conditions eases, and the effects of policy measures make themselves felt. The risk should, however, be borne in mind that, if the negative effects from the housing market correction or financial market developments are greater than expected, the U.S. economy may slow further through negative wealth effects, credit tightening, and deterioration in business and consumer sentiment.

The euro area economy continues to expand, though the pace of increase is moderating. Although export growth has recently decelerated and there are causes for concern, such as weakness in indicators of private consumption and volatility in financial markets, activity in the corporate sector, particularly business fixed investment, remains strong and it is likely that economic growth will continue. As for other regions, growth continues to be robust, especially in China, India, and Russia, while the NIEs and ASEAN economies are also maintaining a moderate pace of expansion overall. Thus, the world economy taken as a whole is continuing to expand. However, we need to bear in mind the possibility that, depending on their extent, future disruptions in global financial markets or a slowdown in the U.S. economy may have adverse implications not only for major economies but also for emerging conomies.

At the same time, attention should also be paid to the risk of inflation. In the United States and Europe, consumer prices are continuing to rise due to increased energy and food prices. In China, there are signs of overheating, visible especially in fixed investment, and inflation is rising, with food prices increasing at a faster pace. Meanwhile, given the high prices of grains such as wheat and soybeans as well as of crude oil and gold, possible shifts in international commodity prices may also influence the outlook for the global economy and the price situation.

At the G-7 Financial Ministers'' and Central Bank Governors'' meeting held recently, the aforementioned assessment of economic and global financial market conditions was generally agreed. Moreover, participants reaffirmed that they would address their domestic concerns within a cooperative framework so as to realize financial market stability and sustainable growth on a global basis.

The Current Situation and the Outlook for the Japanese Economy

As for Japan''s economy, we expect that, although the pace of growth may remain slow for a while, the economy is likely to continue its sustained expansion under conditions of price stability since the virtuous circle of growth in production, income, and spending will remain
basically intact. Careful attention, however, should be paid to risk factors such as the aforementioned developments in overseas economies and global financial markets as well as the effects of high energy and materials prices.


In the corporate sector, business sentiment is characterized by caution, because of the following factors. First, the revised Building Standard Law, which came into force in June last year, has been pushing down housing investment significantly. Second, the elevated prices of materials such as crude oil have been reducing profits, especially at small firms. And third, the subprime mortgage problems have been generating increased uncertainty about the future course of the world economy. However, since overseas economies as a whole continue to expand, exports to a broad range of regions, including emerging economies and oil producing countries, are increasing and their overall trend remains upward. In this situation, production to date has continued to increase. Looking forward, however, production is expected to remain flat for a while, mainly because the accelerated production of automobiles to make up for the disruption caused by the Niigata-ken Chuetsu-oki Earthquake in July 2007 is coming to an end. Nevertheless, production is likely to resume its upward momentum, given that levels of inventories and shipments are essentially well in balance.

Business fixed investment is also likely to follow an uptrend, as firms are not under pressure to adjust production capacity or employment. Let me now turn to developments in the household sector. Nominal wages per worker have been somewhat weak, but moderate growth in employee income is continuing, supported by an increase in the number of employees. The gradual increase in employee income is likely to continue, as it is expected that firms will continue to experience labor shortages and corporate profits will remain generally high. In this situation, private consumption is expected to follow a gradual uptrend. However, as prices of daily necessities such as food and gasoline have been rising recently, consumer sentiment appears to have deteriorated, and this may have adverse consequences to which attention will need to be paid.

Meanwhile, housing investment, which has been suffering significant declines as a result of procedural changes accompanying the enforcement of the revised Building Standard Law, is nevertheless expected to recover gradually as the delays in the confirmation of building applications are resolved. In fact, the number of housing starts has already been showing signs of recovery. The pace of recovery, however, is still uncertain, since sales of condominiums, whose prices are rising, remain relatively weak. Regarding prices, the domestic corporate goods price index (CGPI) has been rising mainly due to higher international commodity prices. The year-on-year rate of change in the consumer price index (CPI, excluding fresh food) posted a 0.8 percent increase in December due mainly to rises in the prices of petroleum products and food products. This positive trend in the rate of change is expected to continue: in the short run, due to the effects of high prices of petroleum products and food products; while in the longer run, because supply and demand conditions in the overall economy are expected to tighten as the moderate economic expansion continues.


Available at:

http://www.boj.or.jp/en/type/press/koen07/ko0802c.pdf