Monthly Economic Report (September 2005)


Assessment of the current state of the Japanese economy


  The economy is recovering at a moderate pace with the corporate sector as well as the household sector improving.
  As for short-term prospects, the economic recovery supported by the domestic private demand is expected to continue, as resiliency in the corporate sector is extending into the household sector. On the other hand, attention should be given to an effect which developments of oil prices in particular have on both domestic and overseas economies.


Policy stance

  Acceleration and expansion of structural reforms will be pursued based on "Basic Policies for Economic and Fiscal Management and Structural Reform 2005." Regarding the budgetary process for the fiscal year 2006, the budget, expected to complete the reforms, addresses drastic cuts in fiscal expenditures to improve the primary balance, restraining the amount of public bond to be issued and simultaneous achievement of both dynamism of the economy and sound public finance.

  The Government, with the Bank of Japan, will further strengthen and enhance its policy efforts to ensure a breakaway from deflation in the concentrated consolidation period.


Detailed explanations


1.Demand trends such as consumption and investment

  While increased private inventory contributed to a reduction in real GDP growth during the April-June 2005 quarter, positive factors including increased private non-residential investment, increased private consumption, net exports (exports minus imports) of goods and services contributed to a 0.8% increase over the previous quarter (3.3% annualized), marking the third consecutive quarter recording positive growth. Nominal GDP was up 0.4% (third consecutive quarter with positive growth) from the previous quarter.

Private consumption is increasing moderately.
  Private consumption is increasing moderately, reflecting an improvement of consumer confidence and moderate increase of income. The Synthetic Consumption Index, which synthesizes demand-side statistics (Family Income and Expenditure Survey, etc.) and supply-side statistics (Indices of Industrial Producer's Shipment, etc.) decreased in July, but is moderately increasing as a trend.

  As for short-term prospects, private consumption is expected to continue to increase as improvement of the employment situation has led 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 non-manufacturers posted a decrease in the April - June quarter of 2005 from the previous quarter but it has increased for four consecutive quarters in manufacturers.

  According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment in fiscal 2005 is showing an increase for the third consecutive year. Business investment is expected to remain on an increasing trend, as corporate profits have been continuing to improve.

Housing constructionhas been increasing recently.
  Housing construction has been increasing recently. This is because construction of houses for rent and construction of houses for sale increased, although construction of owned houses has been decreasing slightly. Housing starts are expected to move steadily if the income environments in households continue to recover along with the improvement in the employment situation.

Public investment has been generally sluggish.
  Public investment has been generally sluggish.

Exports are picking up.Imports are increasing moderately. The surplus in the trade and services balance is decreasing.
  Exports are picking up. By region, exports to Asia have been recovering as a whole, as exports of general machinery have been recovering although exports of electrical equipment have been flat. Exports to the US are moderately increasing, with exports of transportation equipment on an increasing trend. Exports to the EU have been flat, with exports of electrical equipment moving steadily. For short-term prospects, exports are expected to increase with the steady recovery in the world economy.
  Imports have been increasing moderately, especially for mineral fuels, etc. By region, imports from Asia have remained flat as chemical goods, etc. increased, while machinery equipment, etc decreased. Imports from the US have been flat, with imports of machinery equipment, etc. increasing and imports of foods, etc. decreasing. Imports from the EU have been flat, with imports of mineral fuels, etc. increasing and imports of chemical goods, etc. decreasing.
  As for the international balance of payments, although export volume is picking up, the surplus in trade balance has been declining due to a moderate increase in import volume and an upward trend in the price of imports such as the sharp rise in crude oil prices. Meanwhile, the surplus in the goods and services account has decreased, as the deficit in the services account has been almost flat.


2. Corporate activities and employment

Production is leveling off.
  Industrial production is leveling off. Although production of information-related producer goods is almost leveling off, inventory adjustments are steadily progressing. Inventory levels remain low as a whole, while increases have been seen in some areas such as Iron and steel, etc.

  As for short-term prospects, industrial production is expected to pick up with an anticipated increase in production of information-related producer goods, reflecting the steady recovery of the world economy.

Corporate profits are improving. Firms' judgment on current business conditions is moderately recovering. The number of bankrupt companieswhich had been on a downtrends, has become flat recently.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, a year-to-year increase of 12.9% was posted for corporate profits in the April-June quarter of 2005, which has been continuing for 12 consecutive quarters, reflecting increased sales in a wide range of industries such as steel, oil and coal, etc.

  According to the BOJ tankan, both manufacturers and non-manufacturers expect an increase in sales for the third consecutive year in fiscal 2005 and increased ordinary income for the fourth consecutive year.

  The BOJ tankan survey also shows firms' judgment on current business conditions to be moderately recovering.

  The number of bankrupt companies has also been decreasing, but has become flat recently. The number of corporate failures was in the mid 1,100s in August, marking a year-over-year increase for the first time in 2 months, but remaining at a low level.

The employment situation is improving on a broader basis, though some severe aspects remain.
  Although the total unemployment rate is at a high level, it is on a downward trend, and wages have been increasing moderately.
  The number of new job offers has been on an increasing trend. The effective ratio of job offers to applicants has been rising. The number of employees has been on an increasing trend, but decreased in July. Overtime hours worked in the manufacturing industry have been flat.
  As for movement on wages, contractual cash earnings have been increasing moderately due to an increase in full-time workers accompanying improvements in the labor market, but decreased in July. The total special cash earnings from June to July, including bonuses, increased from a year earlier.


3. Prices and the financial market

Domestic corporate goods priceshave been rising due to increased material prices.Consumer prices have been flat.
  Domestic corporate goods prices have been rising.

  Consumer prices have been flat month to month.

  However, consumer prices continued to show a slight declining trend year-on-year. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.

Stock prices have been rising significantly to near 13,000 yen (the Nikkei average). The yen against the U.S. dollar has been seesawing around 110 yen recently.