Monthly Economic Report (March 2004)


Assessment of the current state of the Japanese economy


  The economy continues 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.


Policy stance

  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." As one of such efforts, the Government formulated on March 11 the "Reform Timetable" which indicates the process of reform. The Government will also make efforts in order to seek an early approval by the Diet of the FY2004 budget and related legislation.

  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.


Detailed explanations


1.Demand trends such as consumption and investment

Private consumption is picking up.
  Private consumption is picking up. 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.), increased in January from the previous month.
  Among individual economic indicators for January, the Family Income and Expenditure Survey shows that real consumption expenditure increased from the previous month. Out of sales indicators, retail sales increased from the previous month due mainly to good performance of the first sale of the new year. Home appliance sales increased from a year earlier, as sales of DVD players and thin-shaped TVs continued to be brisk. New car sales decreased in February from the previous month after posting a sharp month-to-month increase in January. Overseas travel continued to decrease from a year earlier, and domestic travel decreased for the first time in four months.
  As for short-term prospects, private consumption is expected to recover if the income environment of households improves, as the employment situation shows movements of an incipient recovery.

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 have been generally picking up and construction work planned, though fluctuating from month to month, has been moderately picking up on average. 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 been increasing recently.
  Housing construction has been increasing recently. In January, housing construction increased 2.7% from the previous month to an annual rate of 1.253 million units, posting a month-to-month increase for two consecutive months, due to increase in construction of owned houses and houses for rent, although construction of houses for sale decreased. Total floor space decreased 0.1% from the previous month due to a decrease in the construction of houses for sale whose per-unit floor space is larger than that of houses for rent, and to an increase in construction of houses for rent. Housing starts are expected to move steadily if income environments of households improve along with the movements of an incipient recovery in the employment situation.

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 supplementary budget for fiscal 2003, public investment-related expenses decreased sharply from the previous fiscal year, as the Government appropriated only about 0.2 trillion yen for disaster countermeasures. 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, public works orders, the public works contract value, and orders received by 50 major companies in the October-December quarter of 2003 decreased from a year earlier, as they did in the previous quarter.
  Public investment in the January-March quarter of 2004 is likely to continue posting a year-on-year decrease in view of the decreases in the contracted amount of public works, etc. in January and the budgetary conditions of the state and local governments.

Exports have increased sharply. Imports have increased moderately. The surplus in the trade and services balance is increasing slightly.
  Exports have increased sharply. By region, exports to Asia, mainly of machinery equipment to China, have increased. Exports to the U.S. as a whole have remained on a moderate increasing trend, although exports of transportation equipment and electrical machinery & equipment have stopped increasing recently. Exports to the EU, mainly of transportation equipment, have increased. 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 have increased moderately in a wide rage of items, including machinery equipment, mineral fuels, chemical products, and metals & metal products. By region, imports from Asia, mainly of textile products from China and machinery equipment from ASEAN countries, have increased moderately. Imports from the U.S., mainly of foods, have decreased. 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 goods and services account has increased slightly, as exports in volume have increased sharply and imports have increased moderately.


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 February and increase in March.
  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, which had been on a downtrend, has become flat recently.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits have posted a year-to-year increase for six consecutive quarters since the July-September quarter of 2002. Among industries, the manufacturing industry, which had continued to post sharp profit increases, saw the improvement of its profits become moderate due mainly to slackening movement of personnel cost reductions. On the other hand, the non-manufacturing industry continued to see its profits improving, reflecting the increase in sales. According to the Bank of Japan short-term business sentiment survey (tankan), corporate profits are expected to increase in fiscal 2003 for the second consecutive year.
  The BOJ tankan survey shows that business sentiment continued improving among manufacturers and showed an improvement among non-manufacturers.
  The number of bankruptcies, which had been on a decreasing trend, has become flat recently. Incidentally, the number of bankruptcies in January 2004 was the lowest level in five years for the month of January, reflecting the increase in the number of applications for safety net guarantees.

While the employment situation still remains severe with the unemployment rate remaining at a high level, 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 January rose 0.1 points from the previous month to 5.0%. The number of unemployed workers increased, as the number of persons in the labor force increased faster than the number of employed persons.
  The number of new job offers has been on an increasing trend. The effective ratio of job offers to applicants has also been on an increasing trend. The number of employees has picked up and overtime hours worked in the manufacturing industry have been on a rising trend. The percentage of business establishments that implemented employment adjustment in the October-December quarter decreased for the second consecutive quarter.
  The underlying trend of contractual cash earnings has remained flat.


3. Prices and the financial market

Domestic corporate goods prices have been on a slight upward trend recently due to a rise in materials prices.Consumer prices are moving sideways.
  Domestic corporate goods prices have been on a slight upward trend recently. Breaking down the recent trend by type of goods, prices of iron & steel, nonferrous metals, and scrap metal have been rising due to a rise in materials prices, while prices of agricultural and marine products decreased from the previous month due mainly to a drop in rice prices. Import prices (yen basis) have been rising, reflecting a rise in the international commodity market.
  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 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 are rising slightly, price-boosting factors behind consumer prices may prove to be short-lived. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.

Stock prices have moved above the 11,000-yen level (the Nikkei average) after hitting a one-year high. The yen has depreciated against the U.S. dollar.
  Stock prices have moved above the 11,000-yen level (the Nikkei average) after hitting a one-year high on expectations of economic recovery and the yen's depreciation against the U.S. dollar. The yen, which began to depreciate in mid-February on concerns about yen-selling, dollar-buying intervention, has been moving at the 111 level against the U.S. dollar recently.
  Short-term interest rates are stable. Long-term interest rates rose against the background of higher stock prices, standing at above 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 12.6% if current deposits by Japan Post are excluded) against the background of ample fund provision from the BOJ. The growth rate of the M2+CD money supply has remained at around 1.5% since October.


4. Overseas economies

The world economy has been recovering steadily.

In the United States, the economy is recovering strongly.
  Production has been increasing and capacity utilization rate has been rising. In addition, business investment has continued to increase and orders for capital goods, which serves as a leading indicator, has been increasing against the background of brighter business outlook.
  Private consumption is increasing, although spending on durable goods decreased. Although employment is picking up, its momentum is still moderate, causing a decline in consumer sentiment.

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 growth of exports. On the other hand, there are concerns about overheated business activities in some sectors. At the National People's Congress that opened in early March, China has set the economic growth rate for 2004 at around 7%. In Thailand economic expansion continues to be led by consumption and investment. In Malaysia, the economy is expanding due to increases in consumption and exports. In Taiwan, the economy is recovering, with consumption and exports increasing. In Singapore, the economy is recovering, with exports and production increasing. In South Korea, the economy shows signs of picking up, with exports and production increasing.

The Euro area economy is recovering moderately, and the U.K. economy has been recovering steadily.
  In the Euro area, the economy is recovering moderately, with domestic demand increasing due to a pickup in investment. The German economy is picking up, with business investment in the October-December quarter posting an increase for the first time in about three years amid a pickup in production. The French economy has been recovering, with consumption and investment increasing moderately.
  In the U.K., the economy has been recovering steadily, with the unemployment rate declining and consumption continuing to increase.

International financial situations
  As for the international financial situations, U.S. stock prices have declined after moving sideways in early March. Stock prices in Europe and Asia moved sideways. Long-term interest rates in major countries declined after moving sideways in early March. The U.S. dollar, which had been on a downward trend, has appreciated since late February, reflecting a brighter outlook for the U.S. economy.
  Oil prices have remained at a high level since OPEC ministers agreed on an oil production cutback at their extraordinary meeting in early February. International commodity prices have remained on a rising trend, reflecting a steady recovery of the world economy.