Monthly Economic Report (January 2005)
Assessment of the current state of the Japanese economy
The economy is recovering at a moderate pace recently, while some weak movements are seen.
As for short-term prospects, the economic recovery is expected to remain solid with steady recovery in the world economy, as the domestic private demand continues to increase. On the other hand, attention should be given to the inventory adjustment in the IT related area and to the developments of exchange rates, crude oil prices and other factors.
- Corporate profits are improving sharply and business investment is increasing.
- Private consumption is decelerating recently.
- The employment situation is improving, though some severe aspects remain.
- Both exports and industrial production are weakening.
Acceleration and expansion of structural reforms will be pursued through early implementation of "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2004." The Government made a cabinet approval on December 20 of the "Economic Outlook for FY 2005 and Basic Economic and Fiscal Management Measures" and made a cabinet decision on December 24 of the "General Account Budget (estimate) for FY2005".
The Government, with the Bank of Japan, will continue to take powerful and comprehensive actions to secure stability of money and capital markets, and will further strengthen its policy efforts to ensure a breakaway from deflation after the intensive adjustment period.
1.Demand trends such as consumption and investment
Private consumption is decelerating recently.
Private consumption is decelerating recently partly due to the temporary effects of typhoons and temperatures which remained relatively high after summer, although income is moving steadily and consumer confidence has continued to improve. 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 increased at a slower pace in recent months, as it slightly decreased in November from the previous month.
Among individual economic indicators for November, the Family Income and Expenditure Survey shows that real consumption expenditure increased from the previous month. Out of sales indicators, retail sales decreased from the previous month due mainly to sluggish sales of seasonal clothing as temperatures stayed relatively high after summer. Home appliance sales decreased from a year earlier due mainly to sluggish sales of personal computers and heating appliances, but sales of DVD recorders and LCD/PDP TVs continued to be brisk. New car sales increased from the previous month both in November and December as sales of new models were brisk. Overseas travel increased from a year earlier, but domestic travel decreased from a year earlier as the number of both Saturdays and Sundays was less than the previous year by one day. Eating out decreased from a year earlier partly due to the fewer number of weekends.
As for short-term prospects, private consumption is expected to increase if improvement of the employment situation leads to improvement of the income environment.
Business investment is increasing.
Business investment is increasing thanks to an improvement of corporate profits and increases in demand. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side indicator of business investment, shows that business investment in manufacturers posted an increase in the July - September quarter of 2004 from the previous quarter and it has increased for four consecutive quarters in non-manufacturers. Shipment of capital goods, which is a supply-side indicator of machinery equipment investment, has been decreasing slightly of late due mainly to the semiconductor manufacturing equipment. Software investment is moderately increasing. The Synthetic Business Investment Index, which synthesizes the demand-side statistics and the supply-side statistics, has been picking up.
According to the Bank of Japan short-term business sentiment survey (tankan), business investment in fiscal 2004 is planned to increase for two years on end and the increase rates have been the highest since 1989 for large manufacturers, and since 1990 for smaller manufacturers, for the survey in September. And corporations' sense of excess capacity, which indicates future business investment, has remained flat. As for leading indicators, machinery orders, which have been weakening somewhat in recent months, increased in November especially in the non-manufacturing industry. Construction work planned have roughly remained flat. Business investment is expected to remain on an increasing trend, as corporate profits are continuing their improvement, although attention needs to be paid to the investment trend of electrical machinery.
Housing constructionhas remained roughly flat.
Housing construction has remained roughly flat. This is because construction of houses for rent and houses for sale moved steadily, although construction of owned houses has been decreasing slightly of late. In November, housing construction decreased 5.3% from the previous month to an annual rate of 1.129 million units. Total floor space generally followed the same movement. Housing starts are expected to move steadily if income environments of households recover along with the improvement 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 budget for FY2004, the Government slashed public investment-related expenses by 3.3% from the previous fiscal year and prioritized budget allocations to areas that will lead to the expansion of employment and private demand, and by scrutinizing the purpose and achievements of each project. Out of local public investment expenses under the fiscal plans of local governments, those for projects undertaken by local governments on their own funding have been slashed by 9.5% from the previous year subjected to systematic curbs over a medium term and priority-based allocations will be implemented.
Reflecting this situation, the public works contract value in the October - December quarter of 2004 decreased from a year earlier, as they did in the previous quarter.
In the supplementary budget for FY2004, the Government plans to take budgetary measures including additional public works projects of 1.2 trillion yen, which consists of national disaster restoration expenses and others. In the general account of the budged plan for FY 2005, the Government plans slash to public investment-related expenses by 4.0% from the previous year and prioritize budget allocations to areas that will lead to the expansion of employment and private demand. Out of local public investment expenses under the fiscal plans of local governments for fiscal 2005, those for projects undertaken by local governments on their own funding plans to be slashed by 3.0% (8.0% after projects sizes correction ) from the previous year subjected to systematic curbs over a medium term and priority-based allocations will be implemented.
Exports have been weakening recently. Imports are moving sideways. The surplus in the trade and services balance is slightly decreasing.
Exports have been weakening recently. By region, exports to Asia have been on a moderate increasing trend, as exports to China, mainly of electrical machinery & equipment, began to pick up. Exports to the U.S. as a whole have remained flat, as electrical machinery & equipment moved sideways while transportation equipment increased. Exports to the EU have been slightly decreasing. As for the outlook for exports, attention needs to be paid to the movement of exchange rates, although exports are expected to increase in line with the steady recovery in the world economy.
Imports are moving sideways. By region, imports from Asia, mainly of machinery equipment and metals & metal products, have increased moderately. Imports from the U.S., which increased in machinery equipment, have been on a decreasing trend. Imports from the EU, mainly of machinery equipment, have been on a moderate decreasing trend.
As for the international balance of payments, the surplus in trade balance has been on a declining trend, as exports in volume have been declining somewhat recently and imports have become flat. On the other hand, the surplus in the goods and services account has slightly decreased, as the deficit in the services account has been on an increasing trend.
2. Corporate activities and employment
Industrial production has been weakening somewhat.
Industrial production is weakening somewhat, as production adjustment movement of information-related producer goods has been accelerated and exports have been weakening recently. Inventory, mainly of information-related producer goods, is increasing, although it remains at a low level as a whole.
As for the prospects of industrial production, the recovery is expected to be slowed as production adjustment movement of information-related producer goods continues, although the world economy has been recovering steadily. The Survey of Production Forecasts indicates industrial production is expected to decrease in December and increase in January.
Tertiary industry activities are increasing moderately.
Corporate profits are improving sharply. Firms' judgment on current business conditions observes a slower improvement. The number of bankrupt companiesis decreasing.
According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits in the July-September quarter of 2004 have posted a year-to-year increase of 37.8%, which is the highest growth rate since the April - June quarter of 2000, as sales are increasing, which has been continuing for nine consecutive quarters. Among industries, profits of the manufacturing industry increased 35.6%, and profits of the non-manufacturing industry increased 39.3%. According to the BOJ tankan survey, both manufactures and non-manufactures are planning an increase in profit for three consecutive years in fiscal 2004. They upgraded the profit projection in the first half of the fiscal year, but downgraded it in the second half.
The BOJ tankan survey also shows that improvement of business sentiment comes to a halt. The diffusion index in large manufacturing industry remains at a high level, although it decreased from a month earlier for the first time in 7 quarters.
The number of bankrupt companies is decreasing. The number of corporate failures was less than 1,100, which is the lowest level since 1990 for November.
The employment situation is improving, though some severe aspects remain.
The employment situation is improving, though some severe aspects remain. The unemployment rate is, while remaining at a high level, on a downward trend.
The unemployment rate in November declined 0.2 percentage points from the previous month to 4.5%. The number of unemployed persons decreased due to decreasing of the number of involuntary unemployed. On the other hand, there are severe situations as the unemployment rate of age group between 15 and 24 years old is at a high level.
The number of new job offers is increasing. The effective ratio of job offers to applicants has been rising. The number of employees, which declined in November, has been on a moderately increasing trend. Overtime hours worked in the manufacturing industry have been flat.
As for movement on wages, contractual cash earnings have been weakening as overtime earnings are decelerating recently.
3. Prices and the financial market
Domestic corporate goods prices have been increasing due to a rise in materials prices.Consumer prices are moving sideways.
Domestic corporate goods prices have been increasing due to a rise in materials prices. Breaking down the recent trend by type of goods, prices of chemical products and plastic products have been rising, reflecting a rise in crude oil prices over the past several quarters, and iron & steel increased due to a rise in commodity markets, while electrical machinery & equipment declined. Import prices (yen basis) have been declining, reflecting the softening of crude oil markets and the appreciation of the yen. Breaking down corporate goods prices by demand-stage, there is an increasing movement in intermediate goods to pass a rise in materials prices to the goods prices and the similar movement can also be seen in the final goods.
Corporate services prices have declined from a year earlier.
Consumer prices are moving sideways. Prices of general commodities are moving sideways as prices of rice declined, although prices of petroleum products increased. General services prices remained generally flat. Public utility charges decreased at a faster pace due to declining of telephone charges.
Although domestic corporate goods prices have been rising, consumer prices remains on a slightly declining trend compared with the previous year. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.
Stock prices are seesawing recently after rising from under 11,000 yen (the Nikkei average) temporarily to the 11,500-yen level. The yen against the U.S. dollar has been moving in the range of 102 and 104-yen levels (interbank spot central rates).
Stock prices are seesawing recently after rising from the under 11,000 yen (the Nikkei average) temporarily to the 11,500-yen level due to buying by foreign investors favoring Japanese stocks in comparison with stock markets in the US and Europe. The yen against the U.S. dollar has appreciated to the 102-level due mainly to concerns about the U.S. current account and fiscal deficits, temporarily depreciating in increasing expectation of a future rise of interest rates in the U.S.
Short-term interest rates are stable. Long-term interest rates have moved around 1.4%. Enterprises' financial conditions have generally improved, and the yield spread between corporate and government bonds has remained at a low level.
The growth of monetary base is easing. The growth rate of the M2+CD money supply has moved sideways since September last year.
4. Overseas economies
The world economy has been recovering steadily.
In the United States, the economy is expanding.
Private consumption, which had moved sideways due to the decrease of spending on durable goods in November, has been on a moderate increasing trend as automobile sales increased in December. Also, consumer confidence, which had continued to decline, has improved reflecting declining energy prices and receding concerns about the employment situation. Nonfarm payroll employment increased by around 160,000 in December, and it increased by around 2.23 million in total for a whole year in 2004.
The core consumer price index is on a stable trend, although a movement to pass a rise in materials prices to the goods prices can be seen due to upward pressures on prices caused by remaining at a high level of energy prices and depreciating trend of the U.S. dollar.
Asia has seen continued economic expansion in China and Thailand.
In China, the economy has been expanding due to a steady increase in consumption and a rise in production caused by growth of exports. The growth of investment in fixed assets has remained flat at a high level, after declining in the first half of 2004. In Thailand economic expansion continues led by consumption and investment. In Malaysia and Singapore, the economies are expanding due to increases in consumption. In Taiwan, the economy is expanding. In South Korea, some weak movements can be seen in export and production, although the economy continues to recover. With respect to the Major Earthquake off the Coast of Sumatra, Indonesia, the damage to the tourism and fishing in Thailand and some neighbor countries have been reported.
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 the moderate increase in production and an incipient recovery in investment. In Germany, the economy is recovering moderately, but personal consumption has been weak due to slow improvement of the employment situation. In France, the economy has been recovering as consumption has been on an increasing trend.
In the U.K., the economy has been recovering steadily, with consumption continuing to increase. Housing investment decreased and house prices increased at a slower pace partly due to the effects of rise in interest rates.
International financial situations
As for the international financial situations, stock markets in the world are generally moving sideways. Long-term interest rates in major countries have remained flat. The U.S. dollar appreciated against Euro in early January.
Oil prices have risen, reflecting market concerns about demand -supply tightening since late December.