Monthly Economic Report (January 2004)
Assessment of the current state of the Japanese economy
The economy is recovering steadily, supported by business investment and exports.
As for short-term prospects, the economic recovery in Japan is expected to continue as the world economy recovers. On the other hand, attention should be given to the developments of exchange rates in particular.
- Both exports and industrial production are increasing.
- Corporate profits continue to improve and business investment is increasing.
- Private consumption is showing movements of a pickup.
- While the employment situation continues to be severe, movements of an incipient recovery can be seen.
The Government will pursue further strengthening of structural reform through early implementation of the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003." Furthermore, the Government made a cabinet decision on January 19 of the "Fiscal 2004 Economic Outlook and Basic Stance for Economic and Fiscal Management" and "Structural Reform and Medium-Term Economic and Fiscal Perspectives: FY2003 Revision." The government submitted the draft budget for FY2004 before the Diet on the same day.
The Government, with the Bank of Japan, will continue to take powerful and comprehensive actions to secure stability of money and capital markets and to emerge from deflation.
1.Demand trends such as consumption and investment
Private consumption is showing movements of a pickup.
Private consumption is showing movements of a pickup. Behind this are the facts that income has become roughly flat and that consumer confidence has continued to show an incipient recovery. The Synthetic Consumption Index, which synthesizes demand-side statistics (Family Income and Expenditure Survey) and supply-side statistics (Indices of Industrial Producer's Shipment, etc.), has been generally picking up, although it declined in November from the previous month after posting an increase for three consecutive months.
Among individual economic indicators for November, the Family Income and Expenditure Survey shows that real consumption expenditure decreased slightly from the previous month. Out of sales indicators, retail sales decreased from the previous month due mainly to sluggish sales of winter clothing caused by warm temperatures. Home appliance sales decreased from a year earlier, although sales of DVDs and thin shape TVs continued to be brisk. New car sales, which posted a sharp year-on-year decrease in November, increased in December. Travel is on a track to recovery, although the margin of decline widened slightly.
As for short-term prospects, private consumption is expected to recover, if the income environment of households improves.
Business investment is increasing.
Business investment is increasing thanks to an improvement of corporate profits and progress in capital stock adjustment. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side indicator of business investment, shows that business investment is on an increasing trend. Software investment remains generally flat.
According to the Bank of Japan short-term business sentiment survey (tankan), business investment in fiscal 2003 in all industries of all sizes is expected to increase for the first time in three years and corporations' sense of excess capacity, which indicates future business investment, has continued its improvement. As for leading indicators, machinery orders has been generally picking up, and construction work planned has remained roughly flat. Business investment is expected to remain on an increasing trend for the immediate future, as corporate profits are expected to continue their improvement.
Housing construction has remained roughly flat.
Housing construction has remained roughly flat since the beginning of fiscal 2003, although it posted a temporary rise and decrease. In November, housing construction decreased 7.9% from the previous month to an annual rate of 1,109 million units due to decrease in construction of owned houses, houses for rent and houses for sale. Total floor space generally followed the same movement. Housing starts are expected to move steadily if the employment and income environments improve and consumer sentiment on acquisition of houses picks up.
Public investment has been generally sluggish.
Reflecting the budget situations of the state and local governments, public investment has been generally sluggish.
In the national budget for fiscal 2003, the Government slashed public investment-related expenses by 3.7% from the previous fiscal year and prioritized budget allocations to areas that would contribute to the expansion of employment and private demand, focusing on four priority areas such as "attractive urban and rural communities rich in unique characteristics and inventiveness." Out of local public investment expenses under the fiscal plans of local governments for fiscal 2003, those for projects undertaken by local governments on their own funding have been slashed by 5.5% from the previous year and subjected to systematic curbs and priority-based allocations.
Reflecting this situation, the public works contract value in the October-December quarter of 2003 decreased from a year earlier, as they did in the previous quarter. In the general account budget for fiscal 2004, the Government has slashed public investment-related expenses by 3.3% from the previous year and prioritized budget allocations by scrutinizing the purpose and achievements of each project based on "Guidelines for Formulation of the FY 2004 Budget." Out of local public investment expenses under the fiscal plans of local governments for fiscal 2004, those for projects undertaken by local governments on their own funding have been slashed by about 9.5% from the previous year and subjected to systematic curbs and priority-based allocations.
Exports are increasing. Imports have been flat. The surplus in the trade and services balance is flat.
Exports are increasing. By region, exports to Asia, mainly of electrical machinery & equipment to China, are on a moderate increasing trend. Exports to the U.S., mainly of electrical machinery & equipment, have increased recently. Exports to the EU, mainly of machinery equipment, have increased recently. As for the outlook for exports, close monitoring is required for the movement of exchange rates, although exports are expected to increase in line with the steady recovery in the world economy.
Imports as a whole have been flat, as imports of mineral fuels have decreased, although imports of machinery equipment, such as office equipment, are on an increasing trend. By region, imports from Asia, mainly of machinery equipment such as office equipment, have increased moderately. Imports from the U.S. have been generally decreasing, although imports of machinery equipment, such as aircraft, increased in November. Imports from the EU have been generally flat, although the monthly fluctuation has become bigger.
Looking at the international balance of payments, the surplus in the trade and services account has been flat, as exports in volume have increased and imports have remained flat, although the deficit in the services account increased due to a rise in the number of Japanese tourists.
2. Corporate activities and employment
Industrial production is increasing.
Industrial production is increasing. Mainly in information-related producer goods and capital goods, industrial production is increasing in broad goods, reflecting increases in exports and business investment. Although inventory remains at a low level, corporations are cautious about inventory building.
As for the prospects of industrial production, the recovery is expected to continue through exports on the strength of the steady recovery in the world economy. Incidentally, the Survey of Production Forecasts indicates industrial production is expected to decrease in December and increase in January 2004.
Tertiary industry activities are increasing moderately.
Corporate profits have continued to improve. Firms' judgement on current business conditions shows improvement. The number of bankrupt companies is decreasing.
According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits in the July-September quarter of 2003 continued to increase from the level of the previous year, reflecting corporations' restructuring efforts including personnel cost reductions, and an increase in sales. Corporate profits on a seasonally adjusted basis also continued to post a quarter-to-quarter increase. According to the Bank of Japan short-term business sentiment survey (tankan), corporate profits are expected to continue increasing in fiscal 2003. Among industries, the manufacturing industry is expected to post a double-digit year-on-year profit increase and the non-manufacturing industry is expected to post a profit increase. By size, big, medium and small corporations are all expected to see their profits increase.
The BOJ tankan survey shows that business sentiment continued improving among manufacturers and showed an improvement among non-manufacturers. As for the future, enterprises as a whole expect a slight deterioration in their business conditions.
The number of bankruptcies has been falling as the number of applications for safety net guarantees has been increasing.
While the employment situation still remains severe with the unemployment rate remaining at a high level and the number of employees decreasing slightly, movements of an incipient recovery can be seen.
The employment situation remains severe with the unemployment rate remaining at a high level due to labor demand factors, such as corporations' reduction stance of personnel expense, and structural factors, such as a mismatch between job offers and seekers.
The unemployment rate in November remained unchanged from the previous month at 5.2%. Although the number of unemployed persons decreased slightly, the number of employed persons also decreased, which leads to increase of the number of persons not in the labour force.
The number of new job offers has been on an increasing trend. The effective ratio of job offers to applicants has been rising. Although the number of employees increased in November, it still has been weak lately. Overtime hours worked in the manufacturing industry have been on a rising trend.
The underlying trend of contractual cash earnings has remained flat.
3. Prices and the financial market
Domestic corporate goods prices and Consumer prices are moving sideways.
Domestic corporate goods prices are moving sideways. Breaking down the recent trend by type of goods, prices of pulp, paper & related products, iron & steel and nonferrous metals have been rising reflecting the firm commodity market and prices of agricultural, forestry & fishery products have been rising due to the effect of a poor rice crop caused by the cold summer, although prices of electrical machinery & equipment have continued a downward trend. Import prices (yen basis) have been declining moderately due to foreign exchange market developments, although the international commodity market has remained firm.
Corporate services prices have remained below the levels of the previous year.
Consumer prices, which had been weakening since the autumn of 2000, have remained flat on a month-to-month basis supported by a rise in some sectors, such as medical treatment fees and rice prices. Prices of general commodities have been declining at a slower pace than in the previous year due to a rise in prices of rice. On the other hand, general services prices remained generally flat. Public utility charges rose from the previous year.
Although domestic corporate good prices and consumer prices are now leveling off, price-boosting factors may prove to be short-lived. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.
The yen has appreciated against the U.S. dollar. Stock prices have moved above the 10,000-yen level (the Nikkei average).
The yen, which began to appreciate in mid-December, has been moving at the 106 level against the U.S. dollar recently. The euro has appreciated against both the yen and the U.S. dollar. It hit the highest level against the U.S. dollar since it was launched in January 1999. Stock prices have moved above the 10,000-yen level (the Nikkei average) and remained on an upward trend since late December, following a global stock price rise.
Short-term interest rates are stable. Long-term interest rates moved sideways, standing at around 1.3%. Enterprises' financial conditions have improved, and the yield spread between corporate and government bonds has remained at a low level.
The growth of the monetary base has remained high (at 10.1% if current deposits by Japan Post are excluded) against the background of ample fund provision from the BOJ, but the growth rate has slackened. The growth rate of the M2+CD money supply has remained at around 1.5%.
4. Overseas economies
The world economy has been recovering steadily.
In the United States, the economy is recovering strongly
Production increases and business sentiment is at a high level. Against this background, corporations' willingness to hire has improved and employment is picking up. As a result, consumer sentiment is improving and private consumption is rising.
The U.S. economy is forecasted to post a high growth rate of around 4%, as consumption and business investment are expected to continue increasing.
Asia has seen continued economic expansion in China and Thailand, and the other Asian economies show increasing signs of recovery.
In China, the economy has been expanding due to a steady increase in consumption and a rise in production caused by high growth of exports. Thailand continues economic expansion led by consumption and investment. In Malaysia, the economy is expanding moderately due to increases in consumption and exports. In Taiwan, the economy is recovering, with consumption increasing moderately and exports and production increasing. In Singapore, the economy has been recovering, with the GDP growth rate for the October-December quarter rising and exports and production increasing. In South Korea, the economy shows signs of picking up, with exports and production increasing
The Euro area economy is picking up, and the U.K. economy is recovering.
In the Euro area, the economy is picking up. Reflecting global economic recovery, business sentiment has improved, industrial production orders have picked up, and production has been flat. In Germany, the economy has stopped contracting, as production shows signs of stabilizing thanks to a pick up in orders received. The French economy is picking up. Production shows signs of picking up, with business sentiment continuing its improvement. Incidentally, the euro has further appreciated against the U.S. dollar. In mid-January, the euro hit the highest level since it was launched in January 1999, becoming a cause for concern in the future.
In the U.K., the economy is recovering, with consumption increasing.
International financial situations
As for international financial situations, stock prices remained on a rising trend backed by global economic recovery. Long-term interest rates in major countries remain mostly flat. The U.S. dollar has depreciated, as U.S. current account deficit remained at a high level.
Oil prices remained on a rising trend, reflecting market concerns about demand-supply tightening.