This is the unedited press release from Bank of Japan

Japan''s economy is expanding moderately as a trend, although the pace of growth seems to be slowing mainly due to the drop in housing investment. Exports and production have continued to increase. Business fixed investment has also continued to trend upward against the background of generally high corporate profits. Private consumption has been firm in a situation where household income has continued rising moderately. Meanwhile, public investment has been sluggish and housing investment has dropped substantially.

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 follow an increasing trend, although it is likely to be 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, 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, long-term interest rates and stock prices have risen compared with last month, while the yen''s exchange rate against the U.S. dollar has been around the same level as last month.

Economic Developments

Public investment has been sluggish (Chart 4). On a GDP basis (first preliminary figures), real public investment has continued to decrease since the start of fiscal 2007 after having risen temporarily in the second half of fiscal 2006. Looking at monthly indicators, the amount of public construction completed—which reflects the progress of public works—declined in the third quarter on a quarter-on-quarter basis, and fell also in October-November compared with the third quarter. The value of public works contracted—a measure that reflects public orders—registered a sizeable decline in the third quarter on a quarter-on-quarter basis, then inched up in the fourth quarter. Public investment is projected to be on a downtrend due to tight national and local fiscal conditions.

Real exports have continued to increase against the background of the expansion of overseas economies (Charts 5[1] and 6). They rose substantially, by 6.0 percent, in the third quarter on a quarter-on-quarter basis, and continued to increase in the fourth quarter, by 1.5 percent, compared with the third quarter. As for real exports by destination, exports to the United States have remained relatively weak as a trend since the end of 2006: they rose in many goods in the third quarter but fell back in the fourth quarter. By contrast, exports to the EU and East Asia increased in the fourth quarter, following the high growth in the third quarter. Exports to other regions (such as the Middle East, Latin America, and Russia) have grown at a faster pace in both the third and fourth quarters, mainly in automobile-related goods to the Middle East.

By goods , exports of automobile-related goods have continued their solid increases, despite fluctuations in those to the United States, mainly due to the high growth in exports to regions other than the United States. Exports of capital goods and parts have continued to trend upward to a wide range of regions, notwithstanding the weakness in those to the United States. Exports of IT-related goods have continued to rise as a trend, assisted by steady global IT-related demand, although they were flat in the fourth quarter after having surged in the third quarter. Exports of intermediate goods have also been on an uptrend, mainly in high value-added goods used for IT-related goods and automobiles.
Exports of consumer goods have been on an uptrend, mainly in digital home appliances, albeit with somewhat large fluctuations. Real imports have been more or less flat recently, mainly due to the increase in import prices, despite the rise in domestic demand and production. Real imports increased by 1.8 percent in the third quarter on a quarter-on-quarter basis but then decreased by 0.6 percent in the fourth quarter.

The recent trend by goods shows that imports of capital goods and parts (excluding aircraft) have continued to be on an increasing trend, reflecting the uptrend in domestic business fixed investment. Meanwhile, imports of IT-related goods were flat in the fourth quarter, after having increased in the third quarter due to the improvement in the domestic shipment-inventory balance (Chart 7[3]). Imports of raw materials and intermediate goods have remained more or less flat on average, since firms have cut back on imports of materials in response to the trend of rising import prices. Imports of foodstuffs and consumer goods have dropped lately, mainly due to the rise in import prices.Net exports in terms of the real trade balance have continued to be on an upward trend, reflecting the aforementioned movements in imports and exports . The surplus of the nominal balance on goods and services has remained on a moderate uptrend assisted by the rise in crude oil prices. Exports are expected to continue rising, due in part to the yen''s depreciation from a somewhat longer-term perspective, as overseas economies are likely to expand although at a slower pace.

As for the environment surrounding exports, in the United States, the economy seems to be slowing down further as adjustments in the housing market have continued to protract, financial institutions have taken tighter lending stances, and the number of employees has appeared to be relatively weak. In the EU, the economy has also started to slow down mildly. In China and other regions, however, those economies are likely to maintain their high growth as a whole.

The NIEs, and ASEAN economies are also expected to continue expanding moderately, although the pace of growth is likely to slow. Regarding the environment surrounding exports of IT-related goods, global demand—particularly for digital home appliances—seems to have continued to expand. Meanwhile, in the foreign exchange market, the yen has appreciated slightly since summer last year, but from a long-term perspective it has remained at significantly low levels in terms of the real effective exchange rate, which incorporates differentials in the inflation rates between home and abroad.

Imports are expected to follow a moderate uptrend, albeit with some sluggishness for the time being, reflecting developments in the domestic economy. Business fixed investment has continued to trend upward. On a GDP basis, real business fixed investment rose in the third and fourth quarters after having dropped in the second quarter. Looking at monthly indicators, the aggregate supply of capital goods (excluding transport equipment)—a coincident indicator of machinery investment—inched downward in the fourth quarter, after having increased for three consecutive quarters. With these fluctuations smoothed out, it has continued to be on an upward trend.

Machinery orders (private demand, excluding orders of shipbuilding and orders from electric power companies)—a leading indicator of machinery investment—declined in the second quarter, but bounced back in the third quarter and increased marginally in the fourth quarter. With these fluctuations smoothed out, they have been more or less flat, at high levels.

Meanwhile, construction starts (floor area,private, nondwelling use)—a leading indicator of construction investment—fell sharply in the third quarter due to the enforcement of the revised Building Standard Law.4 However, they picked up somewhat in the fourth quarter, aided by large-scale construction starts in the manufacturing and retailing sectors.

Business fixed investment is projected to trend upward, since the increasing trend in domestic and external demand and the generally high levels of corporate profits are likely to be maintained. Private consumption has been firm. On a GDP basis (first preliminary figures), real private consumption showed an increase in the fourth quarter, albeit marginally, for the fifth consecutive quarter (Chart 3). Looking at individual indicators on consumption (Charts 12 and 13), sales at department stores and supermarkets have recently been essentially level on average. Sales at convenience stores have also been more or less flat. Sales of household electrical appliances have continued to trend upward, assisted by strong sales of digital home appliances such as flat panel TVs and of game consoles. The number of new passenger-car registrations plunged in December but rebounded sharply in January. With these fluctuations smoothed out, it has picked up since summer last year, supported mainly by the rapid introduction of new models.

As for services consumption, outlays for travel have been firm on average. Sales in the food service industry have also been firm on the whole, although they have lost momentum compared to a while ago. The Indices of Aggregated Sales (in real terms)—which are comprised of major sales indicators of goods and services mentioned above5—have been firm. The aggregate supply of consumer goods—which comprehensively captures producers'' supply of goods—has been trending up mildly, mainly due to favorable conditions for durable consumer goods, albeit with some fluctuations. Meanwhile, looking at private consumption from the demand side, both the index of living expenditure level (two-or-more-person households, in real terms) in the Family Income and Expenditure Survey and total expenditure in the Survey of Household Economy (two-or-more-person households, in real terms) registered a quarter-on-quarter decline in the third quarter. In the fourth quarter, the index of living expenditure level in the Family Income and Expenditure Survey picked up, while the total expenditure in the Survey of Household Economy remained relatively weak.

Consumer sentiment has become cautious as a whole, due to the rise in prices of petroleum products and food as well as to the drop in stock prices. Private consumption is expected to follow a gradual uptrend, with the gradual increase in household income. Housing investment has dropped substantially, affected by the enforcement of the revised Building Standard Law. On a GDP basis (first preliminary figures), real housing investment decreased significantly in the fourth quarter following the plunge in the third quarter. However, the number of housing starts —whose movements precede the actual progress of construction—has shown signs of recovery, primarily in small-scale properties on which the effects from the revised Law have been relatively minor.