(Provisional translation)
Monthly Economic Report
Executive Summary
( December 2010 )




(Assessment of the current state of the Japanese economy)

  The economic movements appear to be pausing recently. It is also in a difficult situation such as a high unemployment rate.

* Exports are decreasing moderately. Industrial production is decreasing recently.
* Corporate profits are improving. Business investment is picking up.
* Firms' judgment on current business conditions shows a sign of caution. However, cautious views about the immediate future are spreading.
* While the employment situation remains severe, movements of an incipient recovery can be seen.
* While private consumption is picking up, some weak movements are also seen.
* Recent price developments show that the Japanese economy is in a mild deflationary phase

  As for short-term prospects, although some weak movements are seen for a while, the economy is expected to be picking up, reflecting improvement in overseas economies and the effects of various policy measures. On the other hand, there are the risks that the economy is depressed by a possible slowdown in overseas economies and fluctuations in exchange rates and stock prices. It should also be noted that there is still a risk of the influence of deflation on the economy and a concern about a possible deterioration of the employment situation

(Policy stance)

  Based on the "New Growth Strategy", the Government implements policy management to get Japanese economy back on a path toward full-scale recovery and to terminate deflation. Considering the present grim situation and concerns about worsening conditions in economy, the Government will steadily implement the Comprehensive Emergency Economic Measures in Response to the Yen's Appreciation and Deflation. On December 16th, the Government determined the Basic Principles of FY2011 Budget Formulation and FY2011 Tax Reform. Placing top priority on casting off deflation, the Government will work as one with the Bank of Japan to launch vigorous and comprehensive policy efforts. The Government expects that the Bank of Japan will support the economy by appropriate and flexible monetary policy management while working closely with the Government.
 





Detailed explanations

1. Demand trends such as consumption and investment
  
While private consumption is picking up, though some weak movements are also seen.
  While private consumption is picking up, some weak movements are also seen. Consumer confidence has been weakening. Real income of employees is picking up. The Synthetic Consumption Index which synthesizes demand-side statistics (Family Income and Expenditure Survey, etc.) and supply-side statistics (Indices of Industrial Producer's Shipments, etc.) decreased in October in comparison to September.
  As for short-term prospects, although some influences of the termination of the subsidies to environmentally friendly vehicles are seen for a while, private consumption is expected to show steady movement, reflecting the effects of policy packages, while employment and income environments remain stable.

Business investment is picking up.
  Business investment is picking up. The Quarterly Financial Statements Statistics of Corporations by Industry, demand-side statistics, show that business investment increased in the April-June quarter of 2010, before increasing in the July-September quarter of 2010 as well. Capital goods Shipments, supply-side statistics, have been almost flat.
  According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment in fiscal 2010 is expected to increase for the first time in three years for both large manufacturers and large non-manufacturers. The figures for Orders Received for Machinery, a leading indicator, are picking up.
  As for short-term prospects, business investment is expected to continue to be on a pickup trend as corporate profits are improving, though a sense of excessive capital stock remains.

Housing construction is picking up.
  Housing construction is picking up. Construction of owned houses and houses for sale is picking up. Construction of houses for rent is in a weak tone.
   for short-term prospects, housing construction is expected to move steadily, reflecting the effects of policy packages, while employment and income environments remain stable.

Public investment has been generally sluggish.
  Public investment has been generally sluggish.
  The amount of contracted public works in November 2010 and public works orders received in October 2010 were lower than in the previous year.
  As for short-term prospects, public investment is expected to be generally sluggish in view of the budget situations of the national and local governments.

Exports are decreasing moderately. Imports have been flat. The surplus in the trade and services balance has been flat.
  Exports are decreasing moderately. By region, exports to Asia are decreasing moderately. Exports to the U.S. and the EU are both picking up. As for short-term prospects, despite rather weak movement that is likely to remain for a while due mainly to the slowdown of production in Asia, exports are expected to pick up again along with a moderate recovery of the world economy.
  Imports have been flat. By region, imports from Asia have been flat. Imports from the U.S. are decreasing moderately. Imports from the EU have been growing at a slower pace recently.
  As for the international balance of payments, the surplus in the trade account has been flat, as both export and import values have been flat. The deficit in the services account has been flat, thus leading the surplus of the trade and services balance to be flat.



2.Corporate activities and employment

Industrial production has been decreasing recently.
  Industrial production has been decreasing recently, especially in the transport machinery sector, etc.As for short-term prospects, while some weak movements are seen as lasting for a while due to a moderate decline in exports and influences of the termination of the subsidies to environmentally friendly vehicles, production is expected to pick up again along with a moderate recovery of the world economy .
  Also, the Survey of Production Forecasts expects an increase in both November and December.

Corporate profits are improving. Firms' judgmenton current business conditions shows a sign of caution. The number of bankrupt companies is on a moderate upward trend.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits during the July-September quarter of 2010 increased by 54.1% in comparison with the previous year, thus an increase for the fourth consecutive quarter, against a backdrop of a pickup in sales. By type of industry, profits in the manufacturing industry increased by 209.0%, and profits in the non-manufacturing industry increased by 19.9%. According to the BOJ Tankan, fiscal 2010 sales are expected to post an increase for the first time in three years, and fiscal 2010 current profits are expected to post an increase for the first time in four years.
  The BOJ Tankan shows that firms' judgment on current business conditions shows a sign of caution. Both large manufacturers and large non-manufacturers' judgments on current business conditions deteriorated for the first time in seven quarters. Small manufacturers' judgments on current business conditions improved for the sixth consecutive quarter, but small non-manufacturers' judgments on current business conditions deteriorated for the first time in six quarters. The number of bankrupt companies is on a moderate upward trend.
The employment situation still remains severe, while movements of an incipient recovery can be seen.
  The employment situation still remains severe, while movements of an incipient recovery can be seen. The total unemployment rate hovered at a high 5.1% in October, an increase of 0.1 percentage points from the previous month. The total unemployment rate of those aged 15 to 24 was 9.3%, an increase of 1.3 percentage points from the previous month.
  The number of new job offers and the effective ratio of job offers to applicants are picking up. The number of employees has been showing movements of picking up recently. Overtime hours worked in the manufacturing industry have decreased.
  As for the movement of wages, contractual cash earnings have been moving horizontally. The total amount of cash earnings has been showing movements of picking up.



3.Prices and the financial market

Domestic corporate goods prices have been flat. Consumer prices continue to decline moderately.
  Domestic corporate goods prices have been flat.
  Consumer prices, in terms of "general, excluding fresh food, petroleum products and other specific components" (referred to as "core core"), continue to decline moderately. As for short-term prospects, consumer prices (core core) are expected to remain on a moderate downward trend. Taken together, these movements show that the Japanese economy is in a mild deflationary phase in that the decline in prices is continuing.

As for stock prices, after declining from the 10,000-yen level to the 9,900-yen level, the Nikkei Stock Average rose to the 10,200-yen level. The yen against the U.S. dollar moved in the direction of depreciation to the 84-yen level, before moved in the direction of appreciation to the 82-yen level, and thereafter it is moving at the 83-yen level.