MONTHLY ECONOMIC REPORT (May 2001)
Assessment of the current state of the Japanese economy
The economy is increasingly weakening.
Reflecting the slowdown of the U.S. economy, Japanese exports have faltered, with the result that industrial production started to fall and inventory increased.
The move towards self-sustained recovery in the corporate sector still continues, but has become weaker in recent months. Although business investment continues to rise, corporate profits are slowing down, and business sentiments are deteriorating sharply, especially in manufacturing industries.
The unemployment rate has hovered at high levels, and private consumption has remained broadly flat.
Short-term prospects involve some concerns, such as U.S. economic slowdown and signs of weaker business investment.
The government puts top priority on an economic revitalization and implements promptly the Emergency Economic Package. Moreover it ceaselessly implements economic and fiscal structural reforms, such as final disposal of non-performing loans, creation of a competitive economic system that is appropriate for the environment of the 21st century, and fiscal structural reforms.
Evaluation of Individual Indicators
1.Demand trends of consumption, investment, etc.
Personal consumption remains broadly flat, although there were last-minute purchases of home appliances prior to the enforcement of the Home Appliances Recycling Law.
Judging from the Family Income and Expenditure Survey, which is an item of statistical data on the demand side, personal consumption posted negative growth in March 2001, although there were last-minute purchases of home appliances prior to the enforcement of the Home Appliances Recycling Law. Even if purchases of automobiles, housing and remittances are excluded in order to eliminate variations arising from big-ticket items with a low purchase frequency and to make conceptual adjustments with the system of national accounts, personal consumption posted negative growth in March.
Judging from statistics on the supply side, sales by retailers showed signs of increasing. The sales value of home appliances has remained sharply higher than a year earlier due to last-minute purchases prior to the enforcement of the Home Appliances Recycling Law. Travel agency sales showed signs of declining, although both domestic and overseas travel sales increased over a year earlier.
On the other hand, department store sales have remained weak and auto sales have been sluggish since the beginning of this year.
In terms of such movement on both the demand and supply sides, personal consumption remains broadly flat, although there was last-minute purchases prior to the enforcement of the Home Appliances Recycling Law.
As for the movement of household income that has a large impact on the movement of personal consumption, regular income in March declined for three consecutive months, with total cash earned posting a year-on-year decrease for two consecutive months in March. Meanwhile, real wages increased slightly. Consumer sentiment is weakening.
Business investment has increased and is expected to remain robust for the time being, mainly in manufacturing industries. 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 and has been 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 expanded to other industries as well. According to the Quarterly Survey of Corporate Enterprises, during the October-December quarter business investment kept rising in manufacturing industries and began to post year-on-year gains in non-manufacturing industries as well. According to the Business and Investment Survey of Incorporated Enterprises, investment (expected results) by large and medium-sized companies during the January-March quarter rose over the preceding quarter.
The outlook for business investment is expected to remain robust for the time being mainly in manufacturing industries, as machinery orders, a leading indicator, have continued their upturn in the second half of last year. However, there have already been signs of slowdown in investment, as can be seen from the Bank of Japan's tankan survey, in which business investment in fiscal 2001, mainly by non-manufacturing industries, is expected to decrease, and from a forecast of a decline in machinery orders in the January-March quarter.
Housing investment is in a weak tone
Housing investment had generally remained at an annual rate of about 1.2 million units since 1999, but are in a weak tone in recent months. After posting a decline for two consecutive months in January and February, housing investment in March stood at an annual rate of 1.207 million units due to a sharp increase in the number of condominium starts. However, for the January-March quarter of 2001, the average monthly housing investment decreased from the preceding quarter to an annual rate of about 1.17 million units
Furthermore, the number of applications for Housing Loan Corp. loans has been declining, a factor that may decrease housing starts in the near future.
Public investment is sluggish as a whole.
Public investment remains generally stagnant, such as contracted public works orders that have continued to fall below the previous-year levels since June 2000. Looking at the movements of public works-related budget in fiscal 2000, as the national budget of the preceding year was at a high level, the revised budget was smaller than the level of the preceding year. As for local governments, the trend to curb investment expenses has continued due to severe financial conditions.
Looking at the trend of construction orders, such orders had shown year-on-year increases since October last year because of the influence caused by the difference in the timing of construction orders within fiscal 2000. However, with the difference in the timing of construction orders having been almost eliminated, some of the indices again began to show sharp declines from year-earlier levels in the January-March quarter.
Public investment in the April-June quarter is not likely to post the kind of sharp decline recorded in the January-March quarter, as public investment earmarked in the initial national budget for fiscal 2001 is almost the same amount as in the preceding year and as the amount of investment expenses to be slashed by local government is smaller than in the preceding year.
Exports are decreasing. Imports remain broadly flat. The surplus in the trade and service account is decreasing.
Exports are decreasing as exports of electric machinery, such as semiconductors and other electronic devices are decreasing, reflecting the economic slowdown in the U.S. and in Asian countries. Exports to Asian countries, mainly to Asian NIEs, decreased, although exports to China increased. Exports to the U.S. and EU countries also decreased. In the future, the continuing slowdown of the U.S. economy is expected to work as a factor to curb exports from Japan.
Imports slackened and remained broadly flat, as imports of machinery and equipment represented by IT-related goods decreased. Imports from Asian countries that had led the uptrend are decreasing as a whole due to a decline in imports of machinery and equipment, although imports from China, mainly textile goods, are increasing moderately. Imports from the U.S. and EU countries are also weakening.
As for the balance of international payments, surplus in the trade and service account is decreasing due to a decline in export volume, although, in February alone, the surplus increased sharply due mainly to a sharp decline in import value.
2.Corporate activity and employment situation
Productionis decreasing and inventory is increasing.
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 been decreasing since the beginning of this year. The decrease is mainly attributable to a slowdown in exports and a resultant fall in production of IT-related goods.
Concerning the outlook for production, declines are projected for April and May and attention should be paid to the fact that actual results have been sharply lower than projections. The fact that inventory, mainly of producer goods such as electronic devices, is increasing is also a cause for concern with regard to the outlook for production.
Tertiary industry activities, mainly in the service industry, have been increasing moderately in recent months.
Corporate profits are increasing at a slower pace. Business confidence is deteriorating rapidly, especially among manufacturers. The number of business failures has remained somewhat high.
Corporate profits have improved since 1999 and significantly rebounded particularly since the second half of 2000. Restructuring efforts made by firms can be cited as the reason for the improvement, but factors such as an increase in sales in manufacturing industries and a cut in variable costs made by non-manufacturing industries until the beginning of 2000 have also made great contributions to the improvement. But according to the Bank of Japan's tankan survey, the growth in corporate profits are forecast to slacken from the second half of fiscal 2000 to the first half of fiscal 2001. According to the Business and Investment Survey of Incorporated Enterprises, the large and medium-sized firms forecasting a decline in their pre-tax profits for the January-March quarter outnumbered those forecasting an increase by a greater margin.
The number of business failures has remained somewhat high, with the number for March standing at 1,703 cases, according to Tokyo Shoko Research Ltd.
The employment situation remains severe. The unemployment rate has stayed at a high level and the number of job offers and overtime hours worked are decreasing.
The unemployment rate remains at a high level, standing at 4.7% in March.
The employment situation continues to show signs of a standstill, causing concerns for the months to come. The number of manufacturers saying they have excess employees has been increasing. New job offers continued to increase over a year earlier (up 8.3% in March) but continued to fall from the preceding month (down 4.0% in March) for three consecutive months. Reflecting the trend of production, overtime hours worked in manufacturing industries posted a decline for the fifth consecutive month. The number of employees is also decreasing.
3.Prices and monetary situation
Domestic wholesale prices and consumer prices are both declining slightly.
Domestic wholesale prices have been declining slightly since the beginning of 2001 due to a fall in the prices of electric machinery and steel. In March, domestic wholesale prices fell 0.1% from the preceding month and 0.5% from a year earlier due to a fall in the prices of agricultural, livestock and marine products, such as eggs, in reaction to a rise in the preceding month and due to a decline in the prices of electric machinery and general machinery, despite a rise in prices of petroleum and coal products. Export prices (yen basis) rose due to the yen's depreciation, although electric machinery (semiconductors) prices declined on a contractual currency basis. Import prices (yen basis) rose as a result of the yen's depreciation along with a rise of crude oil prices on a contractual currency basis. The corporate service price index has continued to decline from a year earlier.
Consumer prices have been declining slightly since the fall of 2000 due to a fall in the prices of textile products and food service (the composite index, excluding perishables, in March was down 0.6% from a year earlier). Consumer prices in the 23 wards of Tokyo in April declined at a slower pace than in March (the composite index, excluding perishables, in April was down 0.9% from a year earlier).
Taken together, these movements show that the Japanese economy is in a mild deflationary phase in that the decline in prices is continuing.
As for the financial situation, the long-term interest rate turned upward in late March as selling to lock in profits increased on the bond market.
Taking a look at the short-term interest rate, the uncollateralized overnight call rate moved at around 0.02% following the Bank of Japan's measure to further ease its monetary policy. 2- and 3-month contracts have remained broadly flat. The long-term interest rate, due partly to the market concerns about economic prospects, had continued a downward trend since the fall of last year and fell to the 1.0% level in late March, but then turned upward as selling to lock in profits increased on the bond market.
Stock prices had remained on a downward trend since the spring of last year, but began to rise gradually in April, reflecting expectations on the Emergency Economic Package and the steady movement of U.S. stock prices.
The exchange rate of the yen against the U.S. dollar had depreciated since the end of last year. But in April, it temporarily appreciated to the 121 level from the 126 level (the lowest level since October 1998) at the beginning of the month before depreciating to the 123 level late in the month. The exchange rate of the yen against the euro hovered between the 107 and 112 level, following the sustained appreciation of the euro against other currencies since the end of last year.
M2+CDs (average monthly balance) had continued to grow 2.0% over a year earlier since the second half of last year, but has remained slightly higher since the turn of the year (March preliminary report: up 2.6% over a year earlier) as a result of the shift of funds from postal savings. Lending by private financial institutions (average balance of total outstanding loans) has continued to decline since the fall of 1996 and still remains stagnant due to factors such as firms' sluggish demand for funds. The lending rate had risen moderately since the termination of the zero interest rate policy but fell slightly in February.
The slowdown of the U.S. economy has become more moderate compared with the end of last year, but concerns over the outlook remain due to factors such as worsening corporate profits. The pace of economic growth in Asia is slowing down.
The pace of world economic growth as a whole is seen to be slowing.
In the U.S., solid movements are seen in durable goods and housing investment, and the fall of consumer and corporate sentiment shows signs of coming to a halt. Meanwhile, domestic demand is growing only at a moderate pace, as corporations restrain capital spending due to worsening corporate profits. Amid the continuing inventory adjustment, manufacturing activities are slowing down. Employment is failing mainly in manufacturing and help supply services and the unemployment rate is rising. The slowdown of the U.S. economy has become more moderate compared with the end of last year, but concerns over the outlook remain due to factors such as worsening corporate profits.
In Western Europe, the German economy is growing moderately but manufacturers' sentiment is worsening. In France, stable economic growth is continuing, with fixed investment underpinning domestic demand. In the U.K., the economy is expanding moderately.
Turning to Asia, the pace of economic growth is rising slightly in China, supported by the steady movements of personal consumption and fixed asset investment. In South Korea, the economy is continuing to its slowdown due to the deceleration in exports coupled with the slower growth rate of production and consumer spending.
As for the international monetary situation, the target range of short-term interest rates in the U.S. was lowered by a half percentage point to 4.50% at an inter meeting of the Federal Open Market Committee on April 18.
As for movements in the international commodity market, crude oil prices rose ahead of a seasonal rise in demand for gasoline in the summer.