Monthly Economic Report (January 2003)

Assessment of the current state of the Japanese economy

While movements of an incipient recovery can be seen in some areas of the economy, the state of the economy has weakened somewhat.

Corporate profits are improving; and business investment is bottoming out.

While job offers are on an increasing trend, employment situation continues to be severe with unemployment rate being at a high level.

Private consumption is flat.

Export has become flat; and industrial production has declined somewhat.

As for short-term prospects, the economy continues to be expected to move towards an incipient recovery if the recovery in U.S. and other economies sustains. On the other hand, there are concerns that the uncertainty surrounding the future of the world economy and sluggishness of domestic stock prices may still exert a downward pressure on final demand.

Policy stance

The Government is steadily implementing the "Comprehensive Measures to Accelerate Reforms." The government has also approved the "Fiscal 2003 Economic Outlook and Basic Stance for Economic and Fiscal Management" on December 19, and decided the "Supplementary Budget for FY2002," which was to be compiled on the basis of the "Program to Accelerate Reform," on December 20, and the "General Account Budget (estimate) for FY2003" on December 24. By disbursing the budgets in an incorporated manner and without a break, and further accelerating structural reform, the government aims to realize a sustained economic growth led by private demand.

The Government and the Bank of Japan together will also continue to take powerful and comprehensive actions to emerge from deflation and to stabilize financial system.

Detailed explanations

1.Demand trends such as consumption and investment

Private consumption is flat.

Private consumption, in terms of movements on both the demand and supply sides, has remained flat, as the environment surrounding households is severe as can be seen in continued weakness of income. Although private consumption as a whole has yet to show a change, increases in some businesses and expenditure items have become moderate.

As for movement on the demand side, robust movement is still seen. The Synthetic Consumption Index posted a rise from three months before but posted a month-to-month decrease for two consecutive months. As for the movement of each expenditure item, the Family Income and Expenditure Survey shows that real consumption expenditure decreased from the previous month due partly to a temporary factor. The increasing trend of basic expenditure items has become moderate, as foods decreased from the previous year.

Sales are weakening on the whole. Retail sales still have a weak tone. Chain store sales as a whole decreased from a year earlier, although foods continued to post a year-on-year increase. Department store sales as a whole decreased from a year earlier, although sales of clothing decreased at a slower pace due to dropping temperature.  New car sales increased from a year earlier, as sales of compact cars remained brisk, but the margin of increase narrowed. Home appliance sales as a whole decreased from a year earlier, as the margin of decrease in personal computers widened, although sales of TVs continued to increase. Domestic travel decreased from a year earlier, but overseas travel increased sharply in reaction to the sharp decrease a year earlier caused in part by the effects of the terrorist attacks in the United States.

Consumer confidence shows movements of an incipient recovery, but the movement has been weakening recently.

Business investment is bottoming out.

Business investment, which has been decreasing since the beginning of 2001, is bottoming out, as production has improved and corporate earnings have been recovering. Financial Statements Statistics of Corporations by Industry Quarterly, which is a demand-side indicator of business investment and which had been decreasing since the January-March quarter of 2001, has been decreasing at a slower pace recently. Shipment of capital goods, which is a supply-side indicator of machinery equipment investment, moved almost sideways. Software investment, which had been firm, has decreased slightly.

Business investment is likely to increase as machinery orders, a leading indicator of machinery equipment investment is believed to have bottomed out in the first half of FY2002. However, after it has bottomed out, business investment is expected to remain at a low level in view of the weak recovery in machinery orders forecast for the October-December quarter and as it is expected to decrease in FY2002 according to the Bank of Japan short-term business sentiment survey (tankan).

Housing investment is decreasing moderately.

Housing construction in FY2001 decreased 3.3% from the preceding fiscal year to 1.173 million units, the first time it has fallen below 1.2 million units in three years. Housing construction in FY2002 has been decreasing moderately due to a decrease in the construction of new condominiums, with housing construction standing at an annual rate of 1.18 million units in the April-June quarter of 2002 and at an annual rate of 1.13 million units in the July-September quarter.

In November, housing construction came to an annual rate of 1.121 million units due to decreases in the construction of houses for rent and houses for sale. Factors that decrease housing construction are still observed. For example, consumer sentiment with regard to acquiring houses has been declining due to the harsh employment and income environments and the long-term downward trend of real estate prices that has weakened replacement demand.

Public investment has been generally sluggish.

Under the initial national budget for FY2002, public investment-related expenses, including facility expenses, are to be slashed by 10.7% from the previous fiscal year. Under the fiscal plans of local governments for FY2002, regarding the investment expenses, those for projects to be undertaken by local governments on their own funding are to be slashed by 10.0% from the previous fiscal year. This shows that both the national and local governments have conducted a thorough review of expenditures and a focused allocation of budget.

Reflecting this situation, public investment has been generally sluggish. In FY2002, although the supporting effects of the second supplementary budget for FY2001 that was carried over into the current fiscal year have been seen, public investment continued to decline compared to the previous year in the April-June and July-September quarters, respectively.

Public investment in the October-December quarter is likely to continue posting a year-on-year decrease in view of the decreases in the contracted amount of public works in October and November and the budgetary conditions of the state and local governments.

In a supplementary budget, which will be compiled in response to the "Program to Accelerate Reforms" (decided on December 12), the Government intends to take budgetary measures for public investment promoting structural reform and for disaster contingency planning, including about 2.0 trillion yen on a national expense basis (about 3.4 trillion yen on a project basis).

Exports have become flat. Imports are increasing at a slower pace. The surplus in the trade and services balance has remained almost flat.

Exports, which had been declining somewhat as restocking since the beginning of the year came to a halt, moved sideways as a whole, as communication equipment and scientific/optical equipment increased. By region, exports to Asia moved sideways as a whole and by item. Exports to the U.S. increased as exports of automobiles for inventory replenishment increased drastically. Exports to the EU, which had been decreasing against the background of a slowdown in economic activity in the Euro Area, moved sideways, as exports of communication equipment and scientific/optical equipment increased. As for the outlook for exports, close monitoring is required for the slowdown in economic activity in the Euro Area and risks concerning the Middle East, although the world economy shows a steady movement, such as a steady recovery of the U.S. economy.

Imports as a whole slackened against the background of a slight decrease in production, although imports of mineral fuels continued to increase. By region, imports from Asia, especially of IT-related machinery equipment, slackened. Imports from the EU remained flat. Imports from the U.S., which fluctuated violently due to harbor strikes in the West Coast, remained flat by and large.

Looking at the international balance of payments, the surplus in the trade and services account has remained almost flat, as export volume moved sideways while import increased at a slower pace.

2. Corporate activities and employment

Industrial production has declined somewhat.

Industrial production, which had increased last year against the background of an increase in exports and a progress and an end in inventory adjustment, has declined somewhat, as exports leveled off, domestic final consumption is weak and corporations are cautious about inventory buildup.

According to the Survey of Production Forecast, industrial production is expected to rise in December and January 2003, but close monitoring is required for the movement of domestic final demand and the U.S. and the world economy.

Tertiary industry activities remain broadly flat.

Corporate profits are improving. Firms' judgement on current business conditions continues improving, albeit moderately. The number of bankrupt companies is decreasing.

According to Financial Statements Statistics of Corporations by Industry, Quarterly, corporate profits, which had posted a sharp decrease in and after the July-September quarter of 2001, especially in the manufacturing industries, such as electric machinery, increased in the July-September quarter of 2002 due partly to corporations' restructuring efforts, although sales continued to decrease. According to the Bank of Japan short-term business sentiment survey (tankan), industries as a whole expect their profits to increase sharply in the second half of FY2002.

The BOJ tankan survey says business sentiment of enterprises, especially of manufacturing industries, has been improving, albeit moderately, although business sentiment of small and medium-sized enterprises has remained severe and at low levels. As for future prospects, enterprises have become cautious, forecasting a slight deterioration of their business.

According to Tokyo Shoko Research, Ltd., the number of corporate failures decreased, with 1,435 companies going bankrupt in November.

The employment situation still remains severe. While job offers are on an increasing trend, the employment situation continues to be severe with the unemployment rate remaining at a high level and wages continued to weaken.

The unemployment rate in November fell 0.2% from the preceding month to 5.3%. The number of unemployed men and women decreased, while the number of employed women increased and the male population not in labor force increased. The number of involuntary job leavers, which accounts for the largest proportion of the unemployed, increased slightly and the number of voluntary job leavers decreased. The number of employees is decreasing as a trend, although it increased slightly in November.

The number of new job offers decreased in November, but is on an increasing trend. The effective job offer ratio continued to increase moderately. Overtime work hours in the manufacturing industries increased in November, but the increasing trend weakened as a trend.

Wages remained weak, with contractual cash earnings continuing a year-to-year decrease, although it remained flat from the previous month.

3. Prices and the financial market

Domestic Wholesale Prices are moving sideways and Consumer Prices are declining slightly.

Import prices have been rising on a contractual currency basis but declining on a yen basis recently due to the influence of exchange movements. Domestic Wholesale Prices have been moving sideways. Recently, the prices of Steel and Pulp, paper & related products have been rising reflecting an end in inventory adjustments, and the prices of Petroleum & coal products have been rising at a faster pace reflecting rises in their import prices, although the prices of Electric power, gas & water and Electrical machinery declined. (Incidentally, Domestic Corporate Goods Prices will be announced instead of Domestic Wholesale Prices starting next month.).

The Corporate Service Price Index has continued to decline from a year earlier.

Consumer Prices have been declining slightly since the fall of 2000. Although General Services moved sideways, General commodities declined due to declines in the prices of Durable goods and other industrial goods, and the margin of decline in the prices of Public services & electricity, gas & water charges widened.

Taken together, these movements show that the Japanese economy is in a mild deflationary phase in that the decline of prices is continuing.

Financial market: The yen (interbank spot central rate) appreciated against the dollar. Stock prices moved at around 8,500 yen level (Nikkei Stock Average).

Short-term interest rates moved in the 0.001-0.002% range reflecting the Bank of Japan's monetary easing policy. Two- and three-month contracts moved almost sideways. Long-term interest rates fell, reflecting market perceptions that the supply-demand condition will improve as planned issuance of government bonds in fiscal 2003 came to the lower end of earlier expectations.

The stock market continued to decline from the beginning of December, with TOPIX falling to the lowest level since 1989 in the middle of December. Later stock prices moved at around 8,500 yen level (Nikkei Stock Average) in late December.

On the exchange market, the yen (interbank spot central rate) appreciated to the 119 yen level in late December, reflecting international political situations, after depreciating to the 125 yen level in early December. In the beginning of January, the yen moved in the 118-120 yen level. Against the Euro, the yen (interbank rate as of 17:00) depreciated to the 125 yen level from late November to early December. Later, the yen moved in the 123-125 yen level range.

The growth of the monetary base (monthly average balance) has remained high at about the 20% level against the background of ample fund supplies (the average balance of current deposits at the Bank of Japan stood at 19.8 trillion yen in December). (December: Up 19.5% over a year earlier.) The growth rate of M2+CDs (monthly average balance) fell to the first half of 2% level (December preliminary report: Up 2.2% over a year earlier), after remained at the first half of 3% level throughout the second half of 2002. The total amount of loans provided by private financial institutions (average balance of all loans) has been decreasing on a year-on-year basis since the fall of 1996. It remains at a low level, reflecting firms' weak demand for funds and so forth. Interest rates on bank loans have recently remained broadly flat, after being on a downward trend since the beginning of last year, reflecting easing monetary policies. Enterprises' financial conditions have remained flat and the yield spread between private bonds and government bonds has remained almost flat.

4. Overseas economies

World economy shows some resiliency in its recovery, although the Euro Area economy is decelerating.

U.S. economy shows some signs of resilient recovery. The growth of private consumption began to pick up. Housing construction is at a high level. Business investment, especially in machinery equipment, is showing signs of picking up. Production is leveling off. Employment is decreasing. Prices are stable.

While the Asian economy is recovering as a whole, the recovery has become moderate in some Asian countries. The pace of economic growth in China is rising. In South Korea and Thailand, the economy is expanding. In Taiwan and Malaysia, the economy is recovering moderately. In Singapore, the economy is recovering at a more moderate pace.

In Europe, (1) The Euro Area economy is decelerating. In Germany, the economy has weakened. In France, the economy is decelerating. (2) The U.K. economy continues movements of a recovery but business confidence is deteriorating.

As for the international financial situation, U.S. stock prices were on a downward trend in December, but rose in early January, as business confidence improved and on expectation of the economic stimulus package to be announced. U.S. long-term interest rates and the dollar weakened in December, but strengthened in early January.

Crude oil prices rose sharply due to the prolonged general strike in Venezuela and a tightening situation over Iraq.