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Monthly Economic ReportExecutive Summary( February 2012 )

(Provisional translation)

(Assessment of the current state of the Japanese economy)

The Japanese economy is still picking up slowly, while difficulties continue to prevail due to the Great East Japan Earthquake.

  • Industrial production is still picking up slowly. Exports are weakening recently.
  • Corporate profits have decreased. Business investment is leveling off while weak movements are seen recently.
  • Firms' judgment on current business conditions shows a small improvement although that for large manufactures is deteriorating. Overall, firms are cautious about the immediate future.
  • The employment situation still remains severe partly due to the earthquake disaster, although it also exhibits signs of picking up.
  • Private consumption holds firm recently.
  • Recent price developments indicate that the Japanese economy is in a mild deflationary phase.

Concerning short-term prospects, reflecting the effects of policy measures, the Japanese economy is expected to continue to pick up moderately. However, there are downside risks that could stem from further slowing down of less resilient overseas economies due to the Eurozone debt crisis which has been a cause for concern over the financial system and markets. It should also be noted that there is still a risk of constraints of electric power supply, the consequences of the nuclear accident, the adverse effects of deflation on the economy and a concern about a possible deterioration of the employment situation.

(Policy stance)

The Government, considering the downside risks stemming from the European sovereign debt crises and others, will make its best effort to avoid the slowdown of the economy, in addition to working through the reconstruction from the Great Earthquake. The Government will also decisively work to overcome deflation and make an utmost effort to prevent the economy from falling into vicious cycle between yen appreciation and deflation.

To this end, the Government swiftly implements "Comprehensive Package Responding to the Yen Appreciation" and the FY2011 third and fourth supplementary budget, and works for early passage of the FY2012 budget and the related bills. The Government also decided the "Fiscal 2012 Economic Outlook and Basic Stance for Economic and Fiscal Management" on January 24th.

The Government will work together with the Bank of Japan, aiming at quickly realizing stable price increase. Toward the exit from deflation, the Government expects that the Bank of Japan will conduct appropriate and decisive monetary policy management while working closely with the Government.

On February 14th, the Bank of Japan decided to publish "the price stability goal in the medium to long term", and to pursue powerful monetary easing by conducting its virtually zero interest rate policy and by implementing the Asset Purchase Program mainly through the purchase of financial assets, with the aim of achieving the goal of 1 percent in terms of the year-on-year rate of increase in the CPI, for the time being until it judges that the 1 percent goal is in sight. The Bank of Japan also decided to increase the total size of the Asset Purchase Program by about 10 trillion yen.

Detailed explanations

1. Demand trends such as consumption and investment

   Real GDP (gross domestic product) in the October-December quarter of 2011 decreased by 0.6% on a quarterly basis (at an annual rate of 2.3%), posting negative growth for the first time in two quarters. Nominal GDP decreased by 0.8% on a quarterly basis, posing negative growth for the first time in two quarters.

Private consumption has shown steady undertone recently.

   Private consumption has shown steady undertone recently. The consumer confidence index is picking up recently. Real income of employees is almost leveling off. 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 December in comparison to November.

   As for short-term prospects, private consumption is expected to move steadily for a while. However, attention should be given to the employment and income situations, and constraints on electric power supply.

Business investment is leveling off while weak movements are seen recently.

   Business investment is leveling off while weak movements are seen recently. The Quarterly Financial Statements Statistics of Corporations by Industry, demand-side statistics, show that business investment decreased both in the April-June quarter of 2011 and the July-September quarter of 2011, while 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 the fiscal year 2011 is expected to increase for the first time in four years for manufacturers, and that for non-manufacturers is expected to decrease for the fourth consecutive year, thus that for all industries is expected to remain unchanged from the previous year. According to the Business Outlook Survey, planned business investment in the fiscal year 2011 is expected to increase for both large manufacturers and large non-manufacturers. The figures for Orders Received for Machinery, a leading indicator, are almost flat.

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

Housing construction has been flat recently.

   Housing construction has been flat recently.

  The total number of sales of condominiums in the Tokyo metropolitan area has been showing movements of picking up recently.

  As for short-term prospects, housing construction is expected to show a steady undertone. However, the supply-demand situations of construction workers, in addition to employment and income environments, should be closely monitored.

Public investment has shown steady undertone, partly due to the effect of the FY2011 supplementary budget.

   Public investment has shown steady undertone, partly due to the effect of the FY 2011 supplementary budget.

   The amount of contracted public works in January 2012 and the amount of public works orders received in December 2011 were higher than in the previous year, partly due to the effect of the FY2011 supplementary budget.

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

Exports are weakening recently. Imports are growing at a slower pace recently. The balance of goods and services remains on a deficit trend.

   Exports are weakening recently because the recovery of overseas economies has weakened. By region, exports to Asia are weakening recently. In particular, exports to Thailand are showing movements of picking up. Exports to the U.S. have been flat recently. Exports to the EU have been decreasing. As for short-term prospects, it should be noted that there are downside risks of overseas economies, the impact of the yen's appreciation, and so on.

   Imports are growing at a slower pace recently. By region, imports from Asia have recently remained flat as a trend, despite a decrease in imports from Thailand due to the flood damage. Imports from the U.S. have been flat. Imports from the EU have been gradually increasing. As for short-term prospects, imports are expected to increase moderately.

   The balance of goods and services remains on a deficit trend. The deficit in the balance of trade in December has decreased, as export values have increased and import values have decreased. The deficit in the services trade has been flat. As for short-term prospects, the balance of goods and services will continue to be on a deficit trend for the time being.


2.Corporate activities and employment

Industrial production is still picking up slowly.

   Industrial production is still picking up slowly, mainly because automobile sales in Japan and overseas are picking up, although the recovery of overseas economies has weakened.

   As for short-term prospects, production is expected to continue picking up slowly. At the same time, attention should be given to possible downside risks of overseas economies, the impact of the yen's appreciation, and constraints on electric power supply.

   Also, the Survey of Production Forecasts expects an increase in both January and February.

Corporate profits have decreased. Firms' judgment on current business conditions shows a small improvement although that for large manufacturers is deteriorating. Overall, firms are cautious about the immediate future. The number of corporate bankruptcies is decreasing moderately.

   According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits during the July-September quarter of 2011 decreased by 8.5% in comparison with the previous year, thus posting a decline for the second consecutive quarter, due to a decrease in sales. Seasonally adjusted changes from the previous quarter showed an increase of 3.6%. By type of industry, profits in the manufacturing industry decreased by 18.7%, and profits in the non-manufacturing industry also decreased, by 2.7%. According to the BOJ Tankan, sales in the fiscal year 2011 are expected to increase for the second consecutive year, and current profits in the fiscal year 2011 are expected to decrease for the first time in two years.

   The Tankan also reveals that firms' judgment on current business conditions shows a small improvement overall. Although non-manufacturers and small and medium-sized enterprises' judgments on current business conditions improved, that for large manufacturers is deteriorating. Overall, firms are cautious about the immediate future. The number of corporate bankruptcies is decreasing moderately, although the impact of the earthquake disaster still remained.

   The number of corporate bankruptcies is decreasing moderately, although the impact of the earthquake disaster still remained.

The employment situation still remains severe partly due to the earthquake disaster, although it also exhibits signs of picking up.

   The employment situation still remains severe partly due to the earthquake disaster, although it also exhibits signs of picking up.

   The total unemployment rate has increased by 0.1 percentage point from the previous month to 4.6% in December. The total unemployment rate of those aged 15 to 24 was 9.3%, an increase of 0.6 percentage points from the previous month. The number of unemployed persons has been increasing and the number of employed persons has been decreasing under the situation that the labor force has been almost flat. The number of employees has remained flat recently.

   The effective ratio of job offers to applicants has been rising because of an upward trend in the number of new job offers, etc. Overtime hours worked in the manufacturing industry have been showing movements of picking up recently.

   As for the movement of wages, while the contractual cash earnings are moving horizontally, the total amount of cash earnings is showing weakness, partly due to a decrease in special cash earnings.

   As for short-term prospects, attention should be given to the impact of the earthquake disaster and production movements.


3.Prices and the financial market

Domestic corporate goods prices have declined moderately. Consumer prices have declined moderately.

   Domestic corporate goods prices have declined moderately.

   Consumer prices, in terms of "general, excluding fresh food, petroleum products and other specific components" (referred to as "core core"), have declined moderately.

   As for short-term prospects, consumer prices (core core) are expected to remain on a moderate downward trend for the time being.

  Consumer prices remain on a declining 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, the Nikkei Stock Average is rising from the 8,500-yen level to the 9,000-yen level. The yen against the U.S. dollar is moving within the range from the 76-yen level to the 77-yen level.

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