Monthly Economic Report (July 2006)
Assessment of the current state of the Japanese economy
The economy is recovering.
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.
- Corporate profits are improving and business investment is increasing.
- Private consumption is increasing moderately.
- The employment situation is improving on a broader basis, though some severe aspects remain.
- Exports and industrial production is increasing moderately.
The Government made a cabinet decision on the "Basic Policies for Economic and Fiscal Management and Structural Reform 2006" on July 7, aiming the enhancement of the growth capacity and competitiveness, the sound public finance, and the realization of safe and reassured, flexible and diverse society. Acceleration and deepening of structural reforms will hereafter be pursued based on the Basic Policies.
On July 14, the Bank of Japan decided to end the zero interest rate and to encourage the uncollateralized overnight call rate to remain at around 0.25 percent.
In order to secure the eradication of deflation during the "Concentrated Consolidation Period" and ensure the sustainable economic growth led by private-sector demand under price stability, the Government and the Bank of Japan will make joint efforts.
1.Demand trends such as consumption and investment
Private consumption is increasing moderately.
Private consumption is increasing moderately, reflecting moderate increase of income, with consumer confidence moving sideways. 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 May but increased moderately as a trend.
As for short-term prospects, private consumption is expected to continue increasing 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.
According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment in fiscal 2006 is showing an increase for the fourth consecutive year, with large manufacturers expected to post a double-digit increase for the third consecutive year, and large non-manufacturers expected to post an increase for the second consecutive year. Business investment is expected to remain on an increasing trend, as corporate profits have continued to improve.
Housing construction has been increasing recently.
Housing construction has been increasing recently. Construction of houses for rent and construction of houses for sale increased, although construction of owned houses has been generally flat. 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 increasing moderately.Imports are increasing moderately. The surplus in the trade and services balance has been flat.
Exports are increasing moderately. By region, exports to Asia have been increasing moderately as a whole as exports of general machinery have been increasing. Exports to the US have been increasing moderately as a whole as exports of transportation equipment have been increasing. Exports to the EU remain flat. For short-term prospects, exports are expected to increase along with the steady recovery of the world economy.
Imports, mainly of machinery equipment, are increasing moderately. By region, imports from Asia have been increasing, especially machinery equipment. Imports from the US have been decreasing and imports from the EU remain flat.
As for the international balance of payments, the surplus in trade balance has remained flat, as both import volume and export volume increased moderately. The deficit in the services account has also remained flat. Due to this, the surplus in the trade and services balance has remained flat.
2. Corporate activities and employment
Production is increasing moderately.
Industrial production is increasing moderately as a whole backed by a moderate increase in exports and an increase in business investment, despite inventory adjustments seen in some areas.
As for short-term prospects, industrial production is expected to continue increasing moderately, reflecting the increase in business investment and the steady recovery of the world economy.
Corporate profits are improving. Firms' judgment on current business conditions is moderately improving. The number of bankrupt companiesremains almost flat.
According to the BOJ tankan, fiscal 2006 sales are expected to post an increase for the fourth consecutive year, and fiscal 2006 current profits are expected to post an increase for the fifth consecutive year.
The BOJ tankan survey also shows that firms' judgment on current business conditions is moderately improving. Large manufacturers' judgment on current business conditions improved for the first time in two quarters, as judgment by such industries as industrial machinery and electrical machinery improved, although judgment by such industries as iron & steel and chemicals worsened. Large non-manufacturers' judgment improved for the third consecutive quarter.
The number of bankrupt companies has remained almost flat. The number of corporate failures was approximately 1,100 in May, marking a year-on-year increase, but remaining at a low level.
The employment situation is improving on a broader basis, though some severe aspects remain.
The employment situation is improving, 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 increasing. The effective ratio of job offers to applicants has been rising. The number of employees has been increasing. Overtime hours worked in the manufacturing industry have also basically leveled off. As for the movement of wages, contractual cash earnings have been increasing moderately.
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 remain flat.
The year-on-year change in consumer prices has been positive since last November. However, since the rate of change has been in the neighborhood of zero percent if petroleum products and other special factors are excluded, we need to keep a close watch on price movements.
Stock prices fell close to the 14,800 yen (Nikkei Stock Average) level after rising to the 15,600 yen level. Long-term interest rates have been moving in the range of the mid 1.8% level after rising from the high 1.7% level.