Monthly Economic Report (February 2007)
Assessment of the current state of the Japanese economy
The economy is recovering, despite some weakness in consumption.
As for short-term prospects, the economic recovery is expected to continue supported by the domestic private demand as high corporate profits currently observed feed 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.
- The employment situation is improving on a broader basis, though some severe aspects remain.
- Private consumption is almost flat.
- Exports have been flat and industrial production is increasing moderately.
The Government made a cabinet decision on January 25 of "Direction and Strategy for the Japanese Economy" which indicates the shape of economic society that Japan should aim at, and the medium-term policy of economic and financial management from here on in order to realize it. On the same day, the Government made a cabinet decision of "Fiscal 2007 Economic Outlook and Basic Stance for Economic and Fiscal Management" and submitted the draft budget for FY2007 to the Diet. Acceleration and deepening of reforms for realization of "New Growth Economy" will be pursued.
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, sharing their basic perspectives on macroeconomic management.
1.Demand trends such as consumption and investment
Real GDP (gross domestic product) in the fourth quarter of 2006 grew by 1.2% on a quarterly basis (at an annual rate of 4.8%), posting positive growth for the eighth consecutive quarter. Nominal GDP grew by 1.2%, posting positive growth for the first time in two quarters.
Private consumption is almost flat.
Private consumption is almost flat, reflecting decelerating income, with consumer confidence 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.), decreased in December from the previous month, but has remained almost flat.
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.
According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment in fiscal 2006 is expected to increase for the fourth consecutive year. Corporations' sense of excess capacity, which indicates future business investment, has been on an improving trend. 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 houses for sale has been increasing, although construction of owned houses has 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.
In public investment in the October-December quarter of 2006, public works orders, orders received by 50 major companies and the contracted amount of public works decreased from the previous year.
Public investment in the January-March quarter of 2007 is considered to have been on a decreasing trend, as the contracted amount of public works in January decreased from a year earlier.
Exports have been flat.Imports have been flat. The surplus in the trade and services balance is increasing.
Exports have been flat. By region, exports to Asia have been flat as a whole, with exports of iron & steel, etc. increasing, and exports of general machinery decreasing. Exports to the US have remained flat. Exports to the EU have been decreasing moderately as a whole as exports of electrical equipment have decreased. 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 as a whole. Imports from the US remained flat as a whole, with imports of machinery equipment decreasing. Imports from the EU remained flat.
As for the international balance of payments, the surplus in trade balance has increased as export value increased and import value decreased. The deficit in the services account has remained flat. Due to this, the surplus in the trade and services balance has increased.
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 third consecutive quarter, as judgment by such industries as chemicals and motor vehicles improved, although judgment by such industries as iron & steel and electrical machinery worsened. Large non-manufacturers' judgment improved for the first time in two quarters.
The number of bankrupt companies has remained almost flat. The number of corporate failures was approximately 1,100 in January, 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 moving horizontally. The effective ratio of job offers to applicants had been moving horizontally but rose in December. The number of employees has been moving horizontally. Overtime hours worked in the manufacturing industry have remained flat.
As for the movement of wages, contractual cash earnings have been moving horizontally. Total cash earnings are increasing moderately on the whole.
3. Prices and the financial market
Domestic corporate goods prices and Consumer prices have been flat.
Domestic corporate goods prices have been flat.
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 17,800 yen (Nikkei Stock Average) level. Long-term interest rates have increased from the mid 1.6% to the low 1.7%.