Monthly Economic Report (October 2007)


Assessment of the current state of the Japanese economy


  The economy is recovering, while some weaknesses are seen recently.
  As for short-term prospects, the economic recovery is expected to continue supported by the domestic private demand as high corporate profits feed into the household sector. On the other hand, attention should be given to effects of developments of the U.S. economy and changes in oil prices on the Japanese economy and overseas economies.


Policy stance

  Acceleration and deepening of reforms will hereafter be pursued based on the 'Economic and Fiscal Reform 2007'. Regarding the budgetary process for the fiscal year 2008, the budget addresses steady implementation of the Basic Policies.
  In order to ensure the sustainable economic growth led by private-sector as well as establish the stability of the level of inflation, the Government and the Bank of Japan will implement the policy management, sharing their basic perspectives on macroeconomic management which are shown on the Basic Policies.


Detailed explanations


1.Demand trends such as consumption and investment

Private consumption is almost flat.
  Private consumption is almost flat. Consumer confidence is weakening while income remains almost flat. Although 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 in comparison with the previous month, it is 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 generally increasing while weak movements have been seen recently.
  Business investment is generally increasing while weak movements have been seen recently. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side statistic, shows that business investment by manufacturing industries increased in the April-June quarter of 2007 while that for non-manufacturing industries decreased.

  According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment for businesses of all sizes in all industries is expected to increase in fiscal 2007 for the fifth consecutive year, with a two-digit increase predicted for large manufacturers for the fourth consecutive year and an increase for large non-manufacturers anticipated for the third consecutive year.

  As for short-term prospects, business investment is expected to remain on an increasing trend, as corporate profits have continued to improve.

Housing constructionhas been decreasing recently.
  Housing construction has been decreasing recently. Construction of owned houses, houses for rent and houses for sale has been decreasing. Though enforcement of the revised Building Standard Law has had an effect for the moment, housing starts are expected to move steadily as long as income environments in households continue to recover along with improvement in the employment situation.

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

  As for public investment in the July-September quarter of 2007, the contracted amount of public works was lower than in the previous year.

Exports have been gradually increasing.Imports have been gradually decreasing. The surplus in the trade and services balancehas been flat.
  Exports have been gradually increasing. By region, exports to Asia have increased as a whole, with exports of electrical equipment increasing. Exports to the U.S. have started to pick up as a whole, with exports of transportation equipment increasing. Exports to the EU have been flat as a whole, with exports of general machinery becoming flat. As for short-term prospects, future movement of the U.S. economy should be closely monitored.

  Imports have been gradually decreasing. By region, imports from Asia have been gradually decreasing. Imports from the U.S. have been gradually decreasing as a whole, with imports of machinery equipment decreasing. Imports from the EU have been gradually increasing.

  As for the international balance of payments, the surplus in trade balance has been flat as both export and import values have increased. The deficit in the services account has remained flat, thus leading to the surplus of the trade and services balance being flat.


2. Corporate activities and employment

Production is picking up.
  Industrial production is picking up due to the progress of inventory adjustment for information-related producer goods and other factors.

  As for short-term prospects, industrial production is expected to increase moderately, reflecting the increase in business investment etc.

Corporate profits are improving. Firms' judgment on current business conditions shows a sign of caution overall, although that for large manufacturers has been flat. The number of bankrupt companiesis on a moderate upward trend.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits posted a year-on-year increase of 12.0% in the April-June quarter of 2007, a gain for 20 consecutive quarters, reflecting increased sales etc.

  According to the BOJ tankan, fiscal 2007 sales are expected to post an increase for the fifth consecutive year, and fiscal 2007 current profits are expected to post an increase for the sixth consecutive year.

  The BOJ tankan shows that firms' judgment on current business conditions shows a sign of caution overall, although that for large manufacturers has been flat. In addition, firms' judgment on current business conditions has been flat for large manufacturers for two consecutive quarters, while it worsened for the first time in 19 quarters for large non-manufacturers.

  The number of bankrupt companies is on a moderate upward trend.

The employment situation is improving steadily, though some severe aspects remain.
  The employment situation is improving steadily, though some severe aspects remain. The total unemployment rate is on a downward trend and has reached the upper 3% level.

  The number of new job offers has been moderately decreasing. The effective ratio of job offers to applicants has been moving horizontally. The number of employees has been increasing. Overtime hours worked in the manufacturing industry are decreasing.

  According to the BOJ tankan, firms' judgment on current employment conditions showed that labor shortage has increased in September.

  As for the movement of wages, contractual cash earnings have been moving horizontally. The total amount of cash earnings has been weakening.


3. Prices and the financial market

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

  Consumer prices have been flat.

  The rate of year-on-year change in consumer prices 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.

As for stock prices, after rising from the 15,800 yen level to the 17,400 yen level, the Nikkei Stock Average is moving at the 17,100 yen level. Long-term interest rates rose from the low 1.5% level to the low 1.7% level and thereafter dropped to the low 1.6% level.