Assessment of the Japanese Economy

The economy is weakening.

Reflecting the slowdown of the U.S.economy, Japanese exports have faltered, with the result that industrial production started to fall.

The move towards self-sustained recovery in the corporate sector still continues, but has become weaker in recent months. Although business investment continues to rise, corporate profits are slowing down, and business sentiments are deteriorating sharply, especially in manufacturing industries.

The unemployment rate has hovered at a high level, and private consumption has remained broadly flat.

Short-term prospects involve some concerns, such as U.S. economic slowdown and signs of weaker business investment.


The Government continues to aim to sustain domestic activities to make sure that the economy achieves a self-sustaining recovery, and to make bold reforms of economic structure for the 21st century.

The Government, based on the discussion at the Government and Governing Coalition Parties' Joint Taskforce for Economic Measures, decided, on April 6th, the Emergency Economic Package with main pillars being 1) Revitalization of the Financial and Corporate Sectors, 2) Structural Reform of the Securities Market, 3) Urban Revitalization and Increasing Liquidity in Land Assets, and endeavors to implement the Package steadily.

The Bank of Japan introduced, on March 19th, new procedures for money market operations with quantitative indicators set as the main target, and announced that the Bank will continue its policies which intend to achieve the same monetary easing effect of the zero-interest rate policy until declining trends in prices are eliminated.

Evaluation of Individual Indicators

1.Demand trends of consumption, investment, etc.

Personal consumption remains broadly flat, although it is higher than it was at the end of last year due to temporary factors.

Judgingfrom the Family Income and Expenditure Survey, which is an item of statistical data on the demand side, personal consumption increased in February 2001 from the preceding month, due partly to a rise in demand for heating oil caused by weather factors and partly to last-minute purchases of home appliances prior to the enforcement of the Home Appliances Recycling Law. Even if purchases of automobiles, housing and remittances are excluded in order to eliminate variations arising from big-ticket items with a low purchase frequency and to make conceptual adjustments with the system of national accounts, personal consumption increased for three consecutive months.

Judging from statistics on the supply side, sales by retailers and chain stores showed signs of increasing. The sales value of home appliances has remained higher than a year earlier partly due to factors like last-minute purchases prior to the enforcement of the Home Appliances Recycling Law, although sales of personal computers faltered. Travel agency sales remained buoyant as a whole. Domestic travel sales decreased from a year earlier but overseas travel sales increased over a year earlier.

On the other hand, department store sales have remained weak and auto sales have been sluggish since the beginning of this year.

In terms of such movement on both the demand and supply sides, personal consumption remains broadly flat, although it is higher than it was at the end of last year due to temporary factors, such as weather and the last-minute purchase of home appliances prior to the enforcement of the Home Appliances Recycling Law.

As for the movement of household income that has a large impact on the movement of personal consumption, regular income in February declined for two consecutive month and both total cash earned and real wages posted year-on-year decreases in February.

Business investment has increased and is expected to remain robust for the time being. But there have been signs of slowdown as far as prospects are concerned.

Business investment has remained on an upward trend since it started to rebound at the end of 1999 and has been a factor to prop up the economy. So far, the advance has been led primarily by manufacturing industries such as electric machinery, but the rising trend has expanded to other industries as well. According to the Quarterly Survey of Corporate Enterprises, during the October-December quarter business investment kept rising in manufacturing industries and began to post year-on-year gains in non-manufacturing industries as well. Judging from the movements of machinery orders and shipments of capital goods, the upward trend is believed to have continued during the January-March quarter.

The outlook for business investment is expected to remain robust for the time being, as machinery orders, a leading indicator, have continued their upturn in the second half of last year. However, there have already been signs of slowdown in investment, as can be seen from the Bank of Japan's tankan survey, in which business investment in fiscal 2001, mainly by non-manufacturing industries, is expected to decrease, and from a forecast of a decline in machinery orders in the January-March quarter.

Housing investment is in a weak tone.

Housing investment had generally remained at an annual rate of about 1.2 million units since 1999. However, after rising in December due to a sharp increase in the number of condominium starts, housing investment fell the next two consecutive months and stood at an annual rate of 1.135 million units in February. The numbers of starts of owner-occupied houses, houses for rent, and houses for sale all fell from the preceding month for the first time in 12 months, pushing the total level lower.

Furthermore,the number of applications for Housing Loan Corp. loans has been declining, a factor that may decrease housing starts in the near future.

Public investment is sluggish as a whole.

Public investment remains generally stagnant, such as contracted public works orders that have continued to fall below the previous-year levels since June 2000. Looking at the movements of public works-related budget in fiscal 2000, as the national budget of the preceding year was at a high level, the revised budget was smaller than the level of the preceding year. As for local governments, the trend to curb investment expenses has continued due to severe financial conditions.

Looking at the trend of construction orders, such orders have shown year-on-year increases since October last year and even for those indices that fell below the previous-year levels, the magnitude of decline has narrowed compared with the first half of the fiscal year. This would be because of the influence caused by the difference in the timing of construction orders within fiscal 2000, as unlike fiscal 1999 when construction orders slowed down after the front-loading, there has been no such front-loading in this fiscal year. However, with the difference in the timing of construction orders having been almost eliminated, some of the indices again began to show sharp declines from year-earlier levels.

Public investment in the January-March quarter is expected to remain weak as a whole compared with the preceding year that witnessed a relatively high level, but the supplementary budget that was compiled in November is expected to prop up the economy.

Exports are decreasing. Imports are slowing down. The surplus in the trade and service account is decreasing.

Exports to the U.S. and to the EU decreased due to the economic slowdown in the U.S. and the depreciation of the euro in the past, respectively. Reflecting the economic slowdown in the U.S. and in Asian countries, exports to Asian countries, mainly to Asian NIEs, have declined sharply, and exports as a whole are decreasing. In the future, the continuing slowdown of the U.S. economy is expected to work as a factor to curb exports from Japan.

Imports have been in an upward trend since the beginning of 1999. But the imports as a whole are slowing down, as imports of machinery and equipment represented by IT-related goods that had led the uptrend are decreasing. Imports from EU countries were in an increasing trend due to the depreciation of the euro in the past but the rising trend appears to have come to a halt. Imports from Asian countries are increasing at a moderate pace and imports from the U.S. have weakened slightly.

As for the balance of international payments, surplus in the trade and service account is decreasing due to a decline in export volume. But in February alone, the surplus increased sharply due mainly to a sharp decline in import value.

2.Corporate activity and employment situation

Production is decreasing.

Industrial production had remained on an upward path since the initial stage of economic recovery at the beginning of 1999 but had become moderate since the fall of 2000 and has decreased recently. The decrease is attributable to a slowdown in exports and a resultant fall in production of IT-related goods.

Concerning the outlook for production, a decline is projected for March and an increase for April, and attention should be paid to the fact that, based on this projected decline for March, production in the January-March quarter will post a sharp decline from the preceding quarter.

Inventory of industrial production as a whole remains broadly unchanged, but inventory of producer goods has increased due to a sluggish demand for semiconductor products.

Tertiary industry activities have remained almost unchanged.

Corporate profits are increasing at a slower pace. Business confidence is deteriorating rapidly, especially among manufacturers.

Corporate profits have improved since 1999 and significantly rebounded particularly since the second half of 2000. Restructuring efforts made by firms can be cited as the reason for the improvement, but factors such as an increase in sales in manufacturing industries and a cut in variable costs made by non-manufacturing industries until the beginning of 2000 have also made great contributions to the improvement. But, according to the Bank of Japan's tankan survey, the growth in corporate profits are forecast to slacken from the second half of fiscal 2000 to the first half of fiscal 2001.

According to the Bank of Japan's tankan survey, business confidence is deteriorating rapidly, mainly in manufacturing industries, such as electric machinery. The deterioration of business confidence is observed both in large and smaller companies and both in manufacturing and non-manufacturing industries.

The number of business failures has remained somewhat high.

The number of business failures has remained somewhat high, with the number for February standing at 1,460 cases, according to Tokyo Shoko Research Ltd. About 70% of the failures are so-called "recession-induced bankruptcies" (business failures caused mainly by sales slump, accumulation of deficits, or difficulties in collecting accounts receivable). By type of industry, business failures are increasing in the construction and wholesale/retail industries.

The employment situation remains severe. The unemployment rate has stayed at a high level and the number of job offers is decreasing.

The unemployment rate remains at a high level, although it fell slightly to 4.7% in February.

The improvement in the employment situation that had been continuing until recently has begun to show signs of a standstill, causing concerns for the months to come. New job offers continued to increase over a year earlier (up 13.1% in February) but continued to fall from the preceding month (down 1.9% in February). Reflecting the trend of production, overtime hours worked in manufacturing industries that are decreasing recently posted a decline for the fourth consecutive month. The number of manufacturers saying they have excess employees has been increasing.

3. Prices and monetary situation

Domestic wholesale prices and consumer prices are both declining slightly.

Domestic wholesale prices have been declining slightly since the beginning of 2001 due to a fall in the prices of electric machinery and steel. In March, domestic wholesale prices fell 0.1% from the preceding month and 0.5% from a year earlier due to a fall in the prices of agricultural, livestock and marine products, such as eggs, in reaction to a rise in the preceding month and due to a decline in the prices of electric machinery and general machinery, despite a rise in prices of petroleum and coal products. Export prices (yen basis) rose due to the yen's depreciation, although electric machinery (semiconductors) prices declined on a contractual currency basis. Import prices (yen basis) rose as a result of the yen's depreciation along with a rise of crude oil prices on a contractual currency basis. The corporate service price index has continued to decline from a year earlier.

Consumer prices have been declining slightly since the fall of 2000 due to a fall in the prices of textile products and food service (the composite index, excluding perishables, in February was down 0.6% from a year earlier). Consumer prices in the 23 wards of Tokyo in March posted the same margin of year-on-year decline as in February (the composite index, excluding perishables, in March was down 1.1% from a year earlier).

Taken together, these movements show that the Japanese economy is in a mild deflationary phase in that the decline in prices is continuing.

As to the financial situation,the short-term interest rate declined sharply as a result of two instances of monetary easing measures taken by the Bank of Japan.

Taking a look at the short-term interest rate, the uncollateralized overnight call rate moved at around 0.15% until mid-March due to the cut in the target rate (from 0.25% to 0.15%) at the end of February, and then moved mostly at around 0.03% following the Bank of Japan's measures to further ease its monetary policy on March 19th. 2- and 3-month contracts declined sharply as a result of the measures for monetary easing taken twice by the Bank of Japan. The long-term interest rate, partly due to the market concerns over economic prospects, had continued a downward trend since the fall of last year and declined significantly in March before turning upward late in the month.

Stock prices have remained on a downward trend since the spring of last year. Toward the middle of March, stock prices, as measured by TOPIX, tumbled to the level last seen in March 1999 (the Nikkei Stock Average fell to 11,819 points), but then rebounded slightly partly on expectations of a progress in the disposal of non-performing loans.

The exchange rate of the yen against the U.S. dollar has depreciated since the end of last year, and in March, it fell to the 124 level, the lowest level since May 1999. The exchange rate of the yen against the euro moved indecisively in March amid the sustained appreciation of the euro against other currencies since the end of last year.

M2+CDs (average monthly balance) had continued to grow 2.0% over a year earlier since the second half of last year but remained slightly higher since the turn of the year (March preliminary report: up 2.6% over a year earlier) as a result of the shift of funds from postal savings. Lending by private financial institutions (average balance of total outstanding loans) has continued to decline since the fall of 1996 and still remains stagnant due to factors such as firms' sluggish demand for funds. The lending rate had risen moderately since the termination of the zero interest rate policy but fell slightly in February.

The Bank of Japan at its monetary policy meeting on March 19th changed the main target in its money market operations from uncollateralized call rate (overnight) to the balance at Bank of Japan accounts and decided to increase the balance to about 5 trillion yen for the time being. At the same time, the Bank has decided to continue the new procedures for money market operations until the year-to-year growth rate of the consumer price index (national and excluding perishables) stays at zero percent or higher and, if necessary, to increase its purchase of long-term government bonds provided that the balance of its long-term government holdings (bonds held < actual holdings after adjustment for gensaki (under repurchase agreement) transactions > base) would not exceed the Bank of Japan notes issued.

4. Overseas economy

The slowdown of the U.S. economy has become more moderate if compared to the end of last year but concerns over the outlook remain due to factors such as falling stock prices. The pace of economic growth in Asia is slowing down.

The pace of world economic growth as a whole is seen to be slowing.

In the U.S., though solid movements are seen in durable goods and housing investment, domestic demand is growing only at a moderate pace, as corporations restrain capital spending due to worsening corporate profit. Meanwhile, the fall of consumer and corporate sentiment show signs of coming to a halt. In manufacturing industries, amid the continuing inventory adjustment, manufacturing activities are slowing down with employment adjustment under way, but employment in construction and service industries are continuing to rise. The slowdown of the U.S. economy has become more moderate if compared to the end of last year but concerns over the outlook remain due to factors such as falling stock prices.

In Western Europe, the German economy is growing moderately. In France, stable economic growth is continuing, with fixed investment underpinning domestic demand. In the UK, though production of crude oil is decreasing, stable economic growth is continuing.

Turning to Asia, the pace of economic growth is slowing slightly in China. In South Korea, the economy is continuing to slow down due to the deceleration in exports coupled with the slower growth rates of production and consumer spending.

As for the international monetary situation, the target range of short-term interest rates in the U.S. was lowered by a half percentage point to 5.00% on March 20th. In the UK, the official interest rate was lower by a quarter percentage point to 5.50% on April 5th.

As for movements in the international commodity market, crude oil prices remained on a downward trend due to the forecasts of diminishing demand resulting from the economic slowdown.