JAPANESE ECONOMY

1. OVERVIEW

Recent economic trends in Japan reveal that personal consumption is gradually recovering, though not strongly as income remains sluggish. Housing construction has recovered. Investment in plant and equipment keeps decreasing substantially as a trend. Public works are bullish as a whole. Exports are broadly stable with those to Asia in an increasing trend.

Inventory adjustment has proceeded and the inventory/shipment ratio has come down to a level lower than a year ago. Industrial production is broadly stable, at a low level, reflecting above final demand conditions. But there are signs of future improvement.

The employment situation has become severer. The number of employee has decreased and the unemployment ratio has risen to an unprecedented level with an increase in involuntary unemployment.

Although lending by private financial institutions remains stagnant, firms are less concerned about financial liquidity. Firms' confidence is on an improving trend, although at a low level.

All in all, the economy is in a severe situation, as the momentum for recovery in private demand remains weak. However, activities are recently slightly improving, as effects of various policy measures, among other things, have spread through the economy.

With such severe economic reality, the Government will strongly promote policies including those in "Emergency Economic Package," "Emergency Employment Measures" and in "Measures for Enhancing Industrial Competitiveness." As for fiscal policies in the near future, the Government will take, if necessary in view of the development of the Japanese economy among other things, flexible and timely measures including the use of public works contingency budget and the provision of the second supplementary FY1999 budget based on the idea of a 15-month budget.

The Japanese economy, in terms of demand, shows that personal consumption is gradually recovering, though not strongly as income remains sluggish. Housing construction has recovered. Investment in plant and equipment keeps decreasing substantially as a trend. Public works are bullish as a whole.

With regard to industry, inventory adjustment has proceeded, and the inventory/shipment ratio has come down to a level lower than a year ago. In such a situation, industrial production has proceeded nearly sideways at a low level, which reflects the moves of final demand, but signs of recovery are seen. Corporate profits are also showing signs of recovering. And enterprises' judgment on business conditions, though still in a severe situation, is towards improvement. The number of bankruptcy which has increased in a degree since early spring, stands, however, at a level substantially lower than a year ago, due mainly to the expansion of the Credit Guarantee.

Severity increases in the employment situation. The unemployment ratio rose to an unprecedentedly high level with a decrease in the number of employees coupled with an increase in involuntary unemployment.

Exports are broadly stable while showing a recovery in shipments for Asia. Imports are gradually increasing. As for the balance of payments, surpluses registered in the trade and service account balance remain almost at the same level. The exchange rate of the yen against the US dollar (interbank spot central rate) in July, after falling from the 120-yen level quoted at the month's beginning to the 122-yen level, rose to the 115-yen level in the month's last ten days.

Reviewing the price movements, domestic wholesale prices recently appear to have hit the bottom of the downward trend, and consumer prices remain stable.

Taking a look at the recent financial situations, short-term interest rates remained at the same level in July. Long-term interest rates remained almost unchanged in July. Stock prices in July rose from the first toward the middle twenty days of the month, and assumed, afterwards, a falling market. Money supply (M2+CD) increased 4.3% in June, compared with the level of the previous year's same month. Further, although with the continued stagnancy in lending by private financial institutions, the feeling of stringent corporate financing has been mitigated in a degree.

Reviewing the economic trends of major nations, the economy of the United States, while a feeling of somewhat opacity over its future is observed, continues to expand. Real GDP, compared at an annual rate with the previous quarters' levels, after increasing 4.3% in the first quarter, 1999, resulted in a 2.3% increase in the second quarter (advance estimate). Both personal consumption, and investment in plant and equipment, increases. Housing construction decelerates in the increase rate, considerably as a reaction to the substantial increase attained in the first quarter, 1999. Industrial production (total, including mining) increases. Employment, while expanding, however, decreases especially in manufacturing industry due mainly to the decreases in exports. Prices in general remain stable. Deficits registered in the long-term interest rates (government bonds for 30-year redemption) rose in the last ten days of July despite the decline shown in the middle ten days. Stock prices (DOW Jones industrial average) rose at the beginning of July to level off at a high level, but fell since the month's last ten days.

In Western Europe, the economy of Germany is decelerating gradually, but certain movements towards recovery are observed. Economic expansion comes to slow down in France. 'The economy of the United Kingdom decelerates, indicating, however, some movements for recovery. Industrial production in both Germany and the United Kingdom is on a decrease trend, but its pace comes to be slower. Expansion of industrial production has been almost at the same level in France. The unemployment rates in both Germany and France, though remaining each still at high levels, have declined in a degree, while the rate remains at a low level in the United Kingdom. Prices remain stable.

In East Asia, expansion of the Chinese economy recently slows. The Korean economy continues to move towards recovery.

Taking a look at the international financial market in July, the US dollar (effective exchange rates) appreciated in the month's first half but depreciated in the subsequent half to a great extent.

Reviewing the international commodity market in July, the CRB commodity forward indices, which took on a falling trend till mid-July, marking the first record below 185 points in five months, were restored, afterwards, to the level at the month's beginning. Spot prices for crude oil (North Sea Brent), after showing an almost straight rise till the middle ten days of July, were quoted at the level of US$19/bl, though with a bearish scene temporarily observed.