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




(Assessment of the current state of the Japanese economy)

  Although the economy continues picking up and movements towards a self-sustaining recovery are seen, environment becomes more severe recently. In addition, the economy remains in a difficult situation such as a high unemployment rate.

* Exports are increasing at a slower pace recently. Industrial production is picking up moderately.
* Corporate profits are improving. Business investment is picking up.
* Firms' judgment on current business conditions is improving. However, firms, especially small and medium-sized enterprises, are cautious about the immediate future.
* While the employment situation remains severe, movements of an incipient recovery can be seen recently.
* Private consumption is picking up.
* Recent price developments show that the Japanese economy is in a mild deflationary phase.

  As for short-term prospects, although some severe aspects remain in the employment situation, the economy is expected to be headed for a self-sustaining recovery as corporate profits continue to improve, reflecting improvement in overseas economies and the effects of various policy measures. On the other hand, the risks that the economy is depressed by a possible slowdown in overseas economies and fluctuations in exchange rates and stock prices are increasing. 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. In order to respond flexibly to downside risks for the economy caused by such factors as the recent appreciation of yen and worries that overseas economies will slow down, the Government determined the "Three-Step Economic Measures for the Realization of the New Growth Strategy" on September 10th. 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 the Bank of Japan to make the utmost efforts toward the termination of deflation by sharing basic perspectives on macroeconomic management. On August 30th, the Bank of Japan decided to expand the fixed-rate funds-supplying operation against pooled collateral.
 





Detailed explanations

1. Demand trends such as consumption and investment
  
Private consumption is picking up.
  Private consumption is picking up due to the effects of policy packages. Consumer confidence continues to show movements of improvement. 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.) increased in July in comparison to June.
  As for short-term prospects, although there are some concerns about potential influences of the termination of the subsidies to environmentally friendly vehicles, 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 decreased in the January-March quarter of 2010, before increasing in the April-June quarter of 2010. Capital goods Shipments, supply-side statistics, are increasing.
  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 showing movements of 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 had picked up, but has been flat recently.
  Housing construction had picked up, but has been flat recently. Construction of owned houses and houses for sale is picking up. Construction of houses for rent is in a weak tone.
  As 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 July 2010 and public works orders received in June 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 growing at a slower pace recently. Imports are picking up moderately. The surplus in the trade and services balance has been flat.
  Exports are growing at a slower pace recently. By region, exports to Asia have been flat recently. Exports to the U.S. and the EU are both picking up. As for short-term prospects, it is expected that exports will continue to show a moderate upward trend while the world economy is recovering moderately.
  Imports are picking up moderately. By region, imports from Asia are increasing moderately. Imports from the U.S. are growing at a slower pace recently. Imports from the EU are picking up.
  As for the international balance of payments, the surplus in the trade account has been flat, while both export and import values have increased. 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 is picking up moderately.
  Industrial production is picking up moderately.
  As for short-term prospects, production is expected to continue to be on a recovery trend for the time being as investment demand is picking up both in and out of Japan, though there are some concerns about potential influences of the termination of the subsidies to environmentally friendly vehicles. Also, the Survey of Production Forecasts expects an increase both in August and September.

Corporate profits are improving. Firms' judgment on current business conditions is improving. However, firms, especially small and medium-sized enterprises, are cautious about the immediate future. The number of bankrupt companies has been almost flat.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits during the April-June quarter of 2010 increased by 83.4% in comparison with the previous year, thus an increase for the third consecutive quarter, against a backdrop of a pickup in sales. By type of industry, profits in the manufacturing industry increased by 553.0%, and profits in the non-manufacturing industry increased by 33.1%. 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 firms' judgments on current business conditions as having improved. Both large manufacturers and large non-manufacturers' judgments on current business conditions improved for the fifth consecutive quarter. Small manufacturers and small non-manufacturers' judgments on current business conditions improved for the fourth consecutive quarter. However, firms, especially small and medium-sized enterprises, are cautious about the immediate future.
  The number of bankrupt companies has been almost flat.

The employment situation still remains severe, while movements of an incipient recovery can be seen recently.

  The employment situation still remains severe, while movements of an incipient recovery can be seen recently. The total unemployment rate hovered at a high 5.2% in July, a decrease of 0.1 percentage points from the previous month. The total unemployment rate of those aged 15 to 24 was 9.1%, a decrease of 2.0 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 almost flat. Overtime hours worked in the manufacturing industry have remained around the same level.
  As for the movement of wages, contractual cash earnings and the total amount of cash earnings have been showing movements of picking up.



3.Prices and the financial market

Domestic corporate goods prices have been flat recently. Consumer prices continue to decline moderately.
  Domestic corporate goods prices have been flat recently.
  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 rising from the 9,200-yen level to the 9,300-yen level, the Nikkei Stock Average declined to the 8,800-yen level, and thereafter it is rising to the 9,000-yen level. The yen against the U.S. dollar has moved in the direction of appreciation from the 85 yen level to the 83 yen level.