Monthly Economic Report (October 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.


Policy stance

  Acceleration and deepening of structural reforms will be pursued based on "Basic Policies for Economic and Fiscal Management and Structural Reform 2006."

  In order to secure the trend of price stability 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.



Detailed explanations


1.Demand trends such as consumption and investment

Private consumption is decelerating recently.
  Private consumption is decelerating recently. Income is increasing moderately and consumer confidence is moving horizontally. 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.), increased in August from the previous month, but has been increasing at a slower pace in recent months.

  As for short-term prospects, private consumption is expected to remain on an increasing trend, as improvement of the employment situation has led to improvement of the income environment. However, attention should be given to the future movement of income.

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 generally flat.
  Housing construction has been generally flat. Construction of owned houses, houses for rent and houses for sale have been generally flat. Housing starts are expected to move steadily as long as 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 have been flat.Imports have been flat. The surplus in the trade and services balance has been flat.
  Exports have been flat. By region, exports to Asia have been increasing moderately as a whole, as exports of electrical equipment have picked up. Exports to the US have remained flat. Exports to the EU have been increasing moderately as a whole as exports of general machinery have been increasing. For short-term prospects, close monitoring is required for the future movement of the U.S. economy.

  Imports have been flat. By region, imports from Asia remained flat. Imports from the US remained flat as a whole, although imports of machinery equipment have increased. Imports from the EU remained flat.

  As for the international balance of payments, the surplus in trade balance has increased, with both import volume and export volume remaining flat. The deficit in the services account has decreased. 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 backed by an increase in business investment, etc.

  As for short-term prospects, industrial production is expected to continue to increase moderately, reflecting the increase in business investment, etc. In addition, attention should be given to the future movement of inventory for information-related producer goods.

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 second consecutive quarter, as judgment by such industries as iron & steel and nonferrous metals improved, although judgment by such industries as pulp & paper and motor vehicles worsened. Large non-manufacturers' judgment remained unchanged.

  The number of bankrupt companies has remained almost flat. The number of corporate failures was approximately 1,100 in August, 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 on an increasing trend. The number of employees has been on an increasing trend. Overtime hours worked in the manufacturing industry have been on a rising trend. The diffusion index of employment conditions by all industries and all enterprises declined 3 percentage points in September, indicating a tighter labor shortage.

  As for the movement of wages, contractual cash earnings have been moving horizontally. The total cash earnings are increasing moderately on the whole. The total special cash earnings from June to August, 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.

  Although the year-on-year change in consumer prices has been positive, the rate of change has been in the neighborhood of zero percent if petroleum products and other special factors are excluded.

  However, we need to keep a close watch on the impact of overseas economic movements on future price movements.

Stock prices rose to the 16,400 yen (Nikkei Stock Average) level, after falling from the 15,800 yen level to the 15,500 yen level. The yen against the U.S. dollar moved in the direction of depreciation to the 119-yen level, after moving in the direction of appreciation from the 117-yen level to the 116-yen level.