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Monthly Economic ReportExecutive Summary( May 2011 )

(Provisional translation)

(Assessment of the current state of the Japanese economy)

The Japanese economy shows weakness recently, due to the influence of the Great East Japan Earthquake. Also, it remains in a difficult situation such as a high unemployment rate.

  • Industrial production and exports have declined recently due to the earthquake disaster.
  • Corporate profits are weighed down and business investment has weakened recently, due to the earthquake disaster.
  • Firms' judgment on current business conditions shows a sign of caution.
  • While the employment situation remains severe, movements of an incipient recovery can be seen. However, the influence of the earthquake disaster has caused some weakness.
  • Private consumption is showing weakness recently, due to the influence of the earthquake disaster.
  • Recent price developments show that the Japanese economy is in a mild deflationary phase.

As for short-term prospects, weakness will continue for a while, due to the influence of the Great East Japan Earthquake. Afterwards, however, as production activities will recover, the economy is expected to resume picking up, reflecting improvement in overseas economies and the effects of various policy measures. There are downside risks that could stem from constraints of electric power supply, a slow recovery of the supply chain and the influence of the nuclear accident and a rise in oil 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 “Guideline on Policy Promotion” decided by the cabinet on May 17th, the Government will overcome the restriction brought about by the great earthquake in a sequential and steady manner, as well as restoring the growth potential of the Japanese economy. Therefore, the government will work for prompt recovery from the Great Earthquake by promoting measures such as the early implementation of the FY2011 first supplementary budget. 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. The Bank of Japan decided the introduction of the funds-supplying operation to support financial institutions in disaster areas on April 28th.

Detailed explanations

1. Demand trends such as consumption and investment

Real GDP (gross domestic product) in the January-March quarter of 2011 decreased by 0.9% on a quarterly basis (at an annual rate of 3.7%), posting negative growth for the second consecutive quarter. Nominal GDP decreased by 1.3% on a quarterly basis, posting negative growth for the second consecutive quarter.

Private consumption is showing weakness recently, due to the influence of the earthquake disaster.

  Private consumption is showing weakness recently, due to the influence of the earthquake disaster. Consumer confidence has been weak. Real income of employees is almost flat. 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 March in comparison to February.

  As for short-term prospects, private consumption is expected to pick up moderately as supply constraints will be eased. However, attention should be given to the possibility of negative impacts exerted by stagnant production activities on employment and income situations, and constraints on electric power supply in summer.

Business investment has weakened recently, due to the influence of the earthquake disaster.

  Business investment has weakened recently, due to the influence of the earthquake disaster. The Quarterly Financial Statements Statistics of Corporations by Industry, demand-side statistics, show that business investment increased in the July-September quarter of 2010, before increasing in the October-December quarter of 2010 as well. Capital goods Shipments, supply-side statistics, has been in a weak tone, due to the earthquake disaster.

  According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment in fiscal 2011 is expected to increase for the second consecutive year for large manufacturers, and that for large non-manufacturers is expected to decrease for the first time in two years. According to the Business Outlook Survey also, planned business investment in fiscal 2011 is expected to increase for large manufacturers, and that for large non-manufacturers is expected to decrease. The figures for Orders Received for Machinery, a leading indicator, are growing at a slower pace recently, but are expected to pickup for the immediate future on the back of rehabilitation demand.

  As for short-term prospects, business investment is expected to resume picking up, due to the restoration demand from the earthquake disaster.

Housing construction is showing weakness, partly due to the earthquake disaster.

  Housing construction is showing weakness, partly due to the earthquake disaster. Construction of owned houses, houses for rent and houses for sale has weakened.

  As for short-term prospects, we should closely monitor employment and incomeenvironments and the supply-demand situations of construction materials.

Public investment has been generally sluggish.

  Public investment has been generally sluggish.

  The amount of contracted public works in April 2011 was lower than in the previous year. The amount of public works orders received in March 2011 was lower than in the previous year.

  As for short-term prospects, a boosting effect by the supplementary budget is expected.

Exports have declined recently due to the influence of the earthquake disaster. Imports are showing movements of picking up. The trade and services accounts turned negative.

  Exports have declined recently due to the influence of the earthquake disaster. By region, exports to Asia, the U.S. and the EU have decreased. As for short-term prospects, although the decrease through a decline in production activities, among others, following the earthquake disaster will continue for some time, exports are expected to resume picking up, reflecting a recovery of production activities and the world economy.

  Imports are showing movements of picking up. By region, imports from Asia are showing movements of picking up. Imports from the U.S. and the EU have been flat. As for short-term prospects, imports will remain on a pickup trend along with an increase in imports of mineral fuels and a recovery of production activities.

  As for the international balance of payments, the surplus in the trade account has been decreasing while export values have decreased substantially and import values have increased. The deficit in the services account has been flat, thus the trade and services accounts turned negative. As for short-term prospects, the trade and services accounts will remain on a deficit trend for a while.


2.Corporate activities and employment

Industrial production has declined in production activities recently due to the earthquake disaster.

  Industrial production has declined in production activities recently due to the earthquake disaster.

  As for short-term prospects, production is expected to pickup as the supply chain has recovered. However, attention should be given to constraints on electric power supply.

  Also, the Survey of Production Forecasts expects an increase in both April and May.

Corporate profits are weighed down, due to the earthquake disaster. Firms's judgment on current business conditions shows a sign of caution. The number of bankrupt companies is almost flat.

  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits during the October-December quarter of 2010 increased by 27.3% in comparison with the previous year, thus an increase for the fifth consecutive quarter, against a backdrop of a pickup in sales. By type of industry, profits in the manufacturing industry increased by 20.0%, and profits in the non-manufacturing industry increased by 31.6%. According to the BOJ Tankan, fiscal 2011 sales are expected to post an increase for the second consecutive year, and fiscal 2011 current profits are also expected to post an increase for the second consecutive year. The quarterly settlement ended in March 2011 shows that corporate profits are weighed down as a result of losses in some companies due to the earthquake disaster.

   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 improved for the first time in two quarters. Small manufacturers' judgments on current business conditions improved for the seventh consecutive quarter, and small non-manufacturers' judgments on current business conditions improved for the first time in two quarters.

  The number of bankrupt companies is almost flat. As for short-term prospects, there are concerns about the influence of the earthquake disaster.

While the employment situation remains severe, movements of an incipient recovery can be seen. However, the influence of the earthquake disaster has caused some weakness.

  While the employment situation remains severe, movements of an incipient recovery can be seen. However, the influence of the earthquake disaster has caused some weakness.

  The total unemployment rate hovered at a high 4.6% in March, the same level as the previous month. The total unemployment rate of those aged 15 to 24 (*) was 8.8%, an increase of 1.3 percentage points from the previous month.

  The number of new job offers decreased substantially in March due to the earthquake disaster. However, the effective ratio of job offers to applicants has been rising, because of the large number of job offers carried forward from February. The number of employees decreased in March due to a decrease in employees for the accommodations industry, and for the eating and drinking services industry. Overtime hours worked in the manufacturing industry decreased substantially in March, reflecting a substantial decrease in production. As for short-term prospects, there are concerns about the influence of the earthquake disaster.

  As for the movement of wages, contractual cash earnings are showing weakness recently due to a decrease in total hours worked. However, the total amount of cash earnings has been moving horizontally, supported by special cash earnings including bonuses. As for short-term prospects, attention should be given to hours worked and the employment situation influenced by the earthquake disaster.

  (*: National values excluding Iwate, Miyagi and Fukushima Prefectures)


3.Prices and the financial market

Domestic corporate goods prices have been rising. Consumer prices have been declining at a slower tempo.

  Domestic corporate goods prices have been rising.

  Consumer prices, in terms of "general, excluding fresh food, petroleum products and other specific components" (referred to as "core core"), are declining at a slower tempo.

  As for short-term prospects, consumer prices (core core) have been expected to remain on a moderate downward trend. However, we need to keep a close watch on the influence of the international commodity prices and supply constraints following the earthquake disaster on future price movements.

  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 9,600-yen level to the 9,400-yen level, the Nikkei Stock Average rose to the 10,000-yen level, and thereafter it is declining to the 9,600-yen level. The yen against the U.S. dollar moved in the direction of appreciation from the 83 yen level to the 80 yen level, and thereafter it is moving at the 81 yen level.

Cabinet Office, Government of Japan1-6-1 Nagata-cho, Chiyoda-ku, Tokyo 100-8914, Japan.
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