MONTHLY ECONOMIC REPORT(March 2001)
Assessment of the Japanese Economy
Economic recovery appears to be pausing.
Reflecting the slowdown of the U.S. economy,Japanese exports have faltered, with the result that industrial production has weakened in recent months.
The unemployment rate has stayed at the ever-highest level, and private consumption has remained broadly flat.
The move towards self-sustained recovery has been seen in rising corporate profits and business investment.
Short-term prospects involve some concerns, such as U.S. economic slowdown and signs of weaker business investment.
The Government continues to aim to sustain domestic activities to make sure that the economy establishes an autonomous recovery path, and to make bold reforms of economic structure for the 21st century.
In this vein, the Government would continue to implement steadily the Revised Budget for Fiscal 2000. It would also endeavor for an early approval of the Budget for Fiscal 2001, and would execute appropriately the Budget in the coming fiscal year. In addition, the Government established the new Headquarter for Economic Measures jointly with the Government parties.
The Bank of Japan has lowered the target rate for the uncollateralized overnight call rate from 0.25 per cent to 0.15 per cent, and the official discount rate from 0.35 per cent to 0.25 per cent.
Evaluation of Individual Indicators
1.Demand trends of consumption, investment, etc.
The real gross domestic product for the October-December quarter of 2000 grew 0.8% over the preceding quarter, of which net exports excluding goods and services (exports minus imports) fell 0.3% (change in contribution from the preceding quarter), contributing in a negative direction, whereas business investment rose 1.1% (the same as in the above), contributing significantly in a positive one. In addition, nominal gross domestic product grew 0.2% (the same as in the above).
Personal consumption remains broadly flat.
Judging from the Family Income and Expenditure Survey which is the statistical data in terms of the demand side, personal consumption that declined in January 2001 from the preceding month is continuing to fluctuate indecisively at present. Further, if factors such as automobiles, housing and remittances are excluded so as to make conceptual adjustments between the national accounts and the exclusion of variations arising from factors like big-ticket items with a low purchase frequency, it can be said that personal consumption in January rose slightly.
Judging from the statistics in terms of supply, retail sales remain broadly flat but rose in January as compared to both the preceding year and month. Chain store sales rose slightly from December. Travel agency sales have continued to rise above the previous-year levels and the sales volume of household appliances has been robust partly due to factors like last-minute demand prior to the enforcement of the Consumer Appliance Recycling Law. On the other hand, department store sales have continued weak movements and auto sales have slightly declined since the beginning of this year.
In terms of such movements on both demand and supply sides, personal consumption has remained broadly flat.
Judging from the movement of household income that has an large impact on the movement of private consumption, though year-end bonuses continued to decline for the fourth straight year according to the sum of specially paid amounts between November 2000 and January 2001 (which witnessed a year-on-year decline of 1.0%) as shown in the Monthly Labor Survey, the magnitude of decline narrowed as compared to fiscal 1999. Although both total cash earned and real wages have risen, stagnation has been seen in regular income.
Business investment has increased in both manufacturing and non-manufacturing industries and the robust trend is expected to continue for the present, but there have been signs of slowdown as far as prospects are concerned.
Business investment has remained on an upward trend since it started to rebound at the end of 1999, thus becoming a factor to prop up the economy. So far, the advance has been led primarily by manufacturing industries such as electric machinery, but the rising trend has been seen expanded to other industries as well. According to Quarterly Survey of Corporate Enterprises, during the October-December quarter business investment rose in manufacturing industries and started to rise from the preceding year in non-manufacturing industries as well.
Also judging from the Bank of Japan's tankan survey, the business investment plan for fiscal 2000 shows the highest growth rate in recent years for both large firms and small and medium-sized firms in manufacturing industries, and even compared to the preceding survey, a significant upward revision (a year-on-year increase of 16.4% and 11.3% respectively for large firms and small and medium-sized firms) has been made.
The outlook for business investment is expected to continue to be robust for the present, as machinery orders, a leading indicator, have continued the upturn in the second half of last year. However, there have already been signs of weakness for the future, such as the predicted decline in machinery orders in the January-March quarter.
Housing investment remains broadly flat.
Housing investment had generally remained at an annual rate of approximately 1.2 million units since 1999. But judging from the recent trend, after the increase in December due to a significant increase in the number of condominium starts, housing investment declined in January, remaining at an annual rate of 1.204 million units. In particular, the total level has been pushed down by the significant declines in the number of starts of owner-occupied single houses built by loans borrowed from Housing Loan Corporation and in the number of starts of condominiums that have so far led the advance for housing starts.
Further, we can see the decline in the number of applications for loans by Housing Loan Corporation, which implies the reduction of housing starts in the near future.
Public investment is sluggish as a whole, but orders received for public works have been higher than year-earlier levels in recent months.
Public investment remains generally stagnant, such as contracted public works orders that have continued to fall below the previous-year levels since June 2000. Judging from the movements of public works-related budget in fiscal 2000, as the national budget of the preceding year was a high level, the revised budget fell below the level of the preceding year. And for local governments, the trend to curb investment expenses has continued due to severe financial conditions.
Looking at the trend of construction orders, recently such orders have shown an upturn as compared to the preceding year and even for those indices that fell below the previous-year levels, the magnitude of decline has narrowed if compared to the first half of the fiscal year. The reason is considered to be the influence caused by the difference in the timing of allocation within this fiscal year, as unlike the preceding fiscal year when construction orders slowed down as a reaction after the front-loading, there has been no such front-loading in this fiscal year.
Public investment in the January-March quarter is expected to continue to be weak in general if compared to the preceding year which witnessed a relatively higher level, but the revised budget prepared in November is considered to prop up the economy.
Exports are decreasing. Imports are increasing moderately. The surplus in the trade and service account is decreasing.
Exports to the U.S. and to EU countries have both weakened due to the influences of the U.S. economic slowdown and the euro depreciation in the past, respectively. Further, reflecting the economic slowdown in the U.S. and in Asian countries, exports to Asian countries, mainly electric machinery, have declined, and exports as a whole are decreasing. In the future, the continuing slowdown of the U.S. economy is expected to work as a factor to curb exports from Japan.
Imports of Chinese-made textile products are increasing, but as imports of machinery and equipment represented by IT-related goods are decreasing, imports as a whole are increasing moderately. Imports from EU countries show an uptrend due to the euro depreciation in the past, but imports from Asian countries are increasing at a moderate pace due to the decrease in imported machinery and equipment. Imports from the U.S. have weakened slightly.
As for the balance of international payments, surplus registered in the trade and service account is decreasing due to a decline in the export volume and a rise in the import volume, although in terms of prices, the surplus expansion effect is at work due to the declining crude oil prices.
2.Corporate activity and employment situation
Industrial production has weakened in recent months.
Industrial production had remained on an upward path since the initial stage of economic recovery at the beginning of 1999 but had become moderate since the fall of 2000 and has weakened recently. The reasons behind this are that IT-related products, having so far led the advance, have ceased to grow and that exports are slowing down.
Concerning the outlook for production, an increase is projected for February and a decline for March, and attention should be paid to the fact that, based on this projected growth rate, production in the January-March quarter will decline from the preceding quarter.
Inventory of industrial production as a whole remains broadly unchanged, but recently inventory of producer goods has increased due to the sluggish demand for semi-conductor products.
Tertiary industries have remained on a broadly unchanged trend.
Corporate profits are continuing to recover markedly. Improvement in business confidence shows signs of a standstill.
Corporate profits have improved since 1999 and significantly rebounded particularly since the second half of 2000 (according to Quarterly Survey of Corporate Enterprises, recurrent profits rose 31.9% in the October-December quarter as compared to the same quarter a year earlier).The efforts of restructuring made by firms are raised as the reason for the recent improvement, but factors such as the increasing sales volume in manufacturing industries and the reduction of variable costs in non-manufacturing industries since the beginning of 2000, too, have made great contributions to this.
Improvement in business confidence shows signs of a standstill judging from business sentiment in the Quarterly Survey of Corporate Enterprises ("rising" versus "falling"), with confidence deteriorating in both manufacturing and non-manufacturing industries and more firms in the whole corporate sector believing that business is unfavorable than those believing the opposite.
The number of business failures has remained somewhat high.
The number of business failures has remained somewhat high, such as business failures in February that stood at 1,460 cases according to a survey conducted by the Tokyo Commerce and Industry Research Ltd.
The employment situation remains severe. The unemployment rate has stayed at a high level and improvement such as an increase in job offers also shows signs of a standstill.
The unemployment rate reached the peak level of 4.9% in December 2000 and remained at 4.9% in January as well. And further, the so far continuing improvement in the employment situation shows signs of a standstill. New job offers continued to increase compared to the same month of the previous year (up 16.7% in January) but fell from the preceding month for the first time in ten months (down 5.2%). The number of employed persons fell from the preceding month for two consecutive months in December and January, after rising for three consecutive months (down 0.5% from the preceding January). As a reflection of the trend of production, overtime hours worked in manufacturing industries that are decreasing recently, continued to decline from the preceding January as well. Also, in the October-December quarter the percentage accounted for by firms that implemented employment adjustments such as "overtime regulation" ceased the downward trend that had been continuing up until then.
3.Prices and monetary situation
Domestic wholesale prices and consumer prices are both declining slightly.
Domestic prices are slightly declining from the beginning of 2001 due to the declining prices of electric machinery and transport equipment. Domestic wholesale prices stayed almost unchanged from the preceding February but are actually continuing to decline from the preceding month, if the factor of temporary price increases due to the low temperature is excluded from edible agricultural, livestock and aquatic products such as eggs. Export prices declined as a result of the yen appreciation along with a decline on the contractual currency basis. Import prices declined as a result of yen appreciation along with a decline on the contractual currency basis. Further, the corporate service price index has continued to decline from the same month a year earlier.
Consumer prices have been declining slightly since the fall of 2000 due to the decline in the prices of textile products and food service (the composite index excluding perishables in January down 0.5% from the same month a previous-year). Further, consumer prices in the 23 wards of Tokyo in January fell by an expanded magnitude from the same month a year earlier (the composite index excluding perishables in February down 0.5% from the same month a year earlier)
As to the financial situation, stock prices have stayed at the lowest level of last year, and the long-term interest rate continues to decline.
Taking a look at the short-term interest rate, the uncollateralized overnight call rate stayed around the level of the target rate (0.25%) in February but around the level of 0.15% in early March due to the target rate cut (from 0.25% to 0.15%) at the end of February. 2 and 3-month money significantly declined between February and early March, as a result of the measures for monetary easing taken by the Bank of Japan at two times. The long-term interest rate, partly due to the market view of concerns over economic prospects, had continued a downward trend since the fall of last year and significantly declined in February and early March as a result of the measures for monetary easing taken by the Bank of Japan.
Stock prices have remained on a downward trend since the spring of last year. After fluctuating indecisively in February, they significantly declined in late February and early March and have stayed at the lowest level of last year.
The exchange rate of the yen against the U.S. dollar has depreciated since the end of last year, moving between 114 and 117 levels in the first half of February and then falling to the 120 level in late February and early March. The exchange rate of the yen against euro fell to 111 in late February and early March, after moving between the 105 and 109 levels amid the sustained euro appreciation against other currencies since the end of last year.
M2+CD (mid-month average balance) had continued to rise broadly by 2.0% from the same month a year earlier since the second half of last year but remained somewhat higher in February (up 2.7% from the same month a year earlier according to the preliminary report in February:) as a result of the fund shift from postal savings. Lending by financial institutions (total average balance as compared to the same month a year earlier) has continued to decline since the fall of 1996, and still remains stagnant due to factors such as firms'sluggish demand for funds. Also, the stringent feeling of corporate finance has come to a halt. The lending rate has risen moderately since the abandonment of the zero interest rate policy but remained broadly unchanged in January.
Further, at the monetary policy meeting on February 28, the Bank of Japan, in addition to the decision to "promote the stabilization of the uncollateralized call rate (overnight money) at approximately 0.15 per cent on average" as its money market management policy until the next meeting, decided to "lower the annual official discount rate to 0.25 per cent, effective as from March 1."
The slowdown of the U.S. economy has become more moderate if compared to the end of last year but concerns over the outlook remain due to factors such as falling stock prices. In Asia, too, the pace of economic growth is seen to be slowing.
The pace of world economic growth as a whole is seen to be slowing.
In the U.S., consumer and corporate sentiment continues to be cautious, and though solid movements are seen in durable goods and housing investment, domestic demand is growing only at a moderate pace. In manufacturing industries, amid the continuing inventory adjustment, manufacturing activities are slowing down with employment adjustment under way, but employment mainly in service industries are continuing to rise. The prices of natural gases are seen rising but basically prices are stable. The slowdown of the U.S. economy has become more moderate compared to the end of last year but concerns remain over the outlook due to factors such as falling stock prices.
In Western Europe, the German economy is growing moderately. In France, underpinned by fixed investment, stable economic growth is continuing. In the UK, though industrial production remains flat recently stable economic growth is continuing.
Turning to Asia, the pace of economic growth is slowing slightly in China due to the deceleration in exports and fixed investment. In South Korea, the economy is continuing to slow down due to the deceleration in exports coupled by the slower growth rates of production and consumer spending.
As for the international monetary situation, in the U.S. the NASDAQ composite index continued to slide and at the end of February it fell below the level of before the intermeating rate cut on January 3.
As for movements in the international commodity market, crude oil prices remained on a downward trend due to the forecasts of diminishing demand resulting from the economic slowdown.