Monthly Economic Report (August 2001)

Assessment of the current state of the Japanese Economy

The economy is further deteriorating.

Private consumption has remained broadly flat, with some weakness in recent months. Housing construction is declining.

The unemployment rate has stayed high, and job offers and overtime hours-worked are edging down.

Exports and industrial production have fallen substantially, and business investment is falling as well.

Short-term prospects involve some concerns, such as the slowdown of the world economy and increases in business inventories.

Policy stance

The Government carries out resolutely ceaseless structural reforms to revitalize the Japanese economy along the lines indicated in "Basic Policies for Macroeconomic Management and Structural Reform of the Japanese Economy", which include thorough resolution of the non-performing loan problem, and implementation of the seven programs of structural reform as a package.

Detailed explanations

1. Demand trends such as consumption and investment

Although personal consumption has remained broadly flat, it shows signs of weakness recently.

The Synthetic Consumption Index has been declining recently.

Looking at the Family Income and Expenditure Survey, which is a statistic of the demand side, the real consumption expenses decreased in June 2001 after posting a month-to-month increase in May.

Sales statistics show that department store sales posted a year-on-year increase thanks in part to the effect of earlier implementation of summer clearance sales and mid-summer gift sales campaigns. Meanwhile, retail sales and chain store sales still have a weak tone.

Looking at durable consumer goods, auto sales increased sharply over a year earlier due in part to introduction of new models. Meanwhile, home appliance sales continued to be weak due in part to a continued large decrease in personal computer sales, although sales of air conditioners increased sharply.

Travel expenses as a whole continued to show signs of slowing down, with travel abroad being better than last year and domestic travel posting a year-on-year decrease.

In terms of such movement on both the demand and supply sides, personal consumption shows signs of weakness recently, although it has remained broadly flat.

As for the movement of household income that has a large impact on the movement of personal consumption, contractual cash earnings posted a slight year-on-year increase for the first time in six months, but cash earnings continued to be smaller than a year earlier due to a sharp decrease in special cash earnings. Consumer sentiment is weakening.

Business investment is decreasing.

Business investment has been on an increase trend since it turned to recovery in 1999 and has been a supporting factor for the economy. However, the Quarterly Survey of Corporate Enterprises shows that business investment as a whole has hit a ceiling. According to the Business and Investment Survey of Incorporated Enterprises, investment (expected results) by large and medium-sized manufacturing and non-manufacturing companies during the April-June quarter rose over the preceding quarter. Shipment of capital goods, which is a reference indicator of machinery equipment investment, has been weak since the beginning of the year.

Business investment is likely to continue its decrease, as business investment in fiscal 2001, especially in the non-manufacturing industries, is expected to decrease in the BOJ's tankan short-term business sentiment survey and machinery orders, a leading indicator of machinery equipment investment, decreased from the previous period in the January-March period and is expected to nearly level off in the April-June period.

Housing investment is decreasing.

Housing construction in the April-June quarter of 2001 decreased to an annual rate of approximately 1.15 million units, posting two consecutive quarter-to-quarter decreases, although approximately 1.2 million units had been constructed each year since 1999. This is mainly because condominium starts, which posted a solid gain last year, have turned steady, and because starts of publicly-financed owned houses decreased sharply after the turn of the year. Behind this lies severe employment and income environments that have weakened consumer sentiment to acquire houses as asset value has been on a long-term downward trend. Housing construction in June came to an annual rate of 1.106 million units, with starts of owned houses increasing but starts of houses for rent and sale decreasing sharply.

Factors that decrease housing construction are still observed. For example, the number of applications for the housing financing by the Housing Loan Corporation has fallen.

Public investment has been generally sluggish.

Public investment has been generally sluggish. The contracted amount of public works based on the guarantee contracts of advanced payment continued to be lower on a year-on-year basis from June 2000 to March 2001. There were also some indications of a sharp decrease from the previous year in the orders received in the January-March period when many fiscal-year-end orders are placed.

Looking at the initial budget for fiscal 2001, the government's public investment-related budget for the year is close to the same amount as in the previous fiscal year, but local governments have continued to curb investment expenses because of their tight financial positions.

Since the beginning of the new fiscal year, although the total amount of orders received and contracts concluded by 50 major companies in April were larger than in the previous fiscal year, they decreased sharply in May and remained smaller in June. This may be because, in the previous fiscal year, many orders were placed in and after May, rather than in April, greatly pushing down the order amount of April. We should also note that the amount of orders placed at the start of a new fiscal year is comparatively small and tends to make the year-on-year comparison volatile.

In view of the budget situation and implementation policy, public investment is likely to continue to post a year-on-year decrease in the July-September quarter.

Exports are decreasing sharply. Imports are decreasing. The surplus in the trade and services balance is decreasing.

Against the backdrop of a slowdown of the world economy, exports have decreased for all regions of Asia, the U.S. and the EU, as exports of general machinery in addition to electrical devices such as semiconductors and other electronic parts decreased sharply. If the slowdown of the world economy continues, it is likely to put a downward pressure on Japanese exports.

Imports, especially of machinery equipment such as semiconductors and other electronic parts have also decreased, reflecting weak domestic demand. By region, imports from Asia have been weak, as imports from the NIEs, especially of machinery equipment, have decreased sharply. Imports from the U.S. and the EU have decreased.

Looking at the international balance of payments, the surplus in the trade and services account has decreased as exports decreased faster than imports.

2. Corporate activities and employment

While industrial production has decreased sharply, inventories have increased.

Industrial production decreased sharply for two consecutive quarters, posting a 3.7% quarter-to-quarter fall in the January-March quarter and a 4.0% quarter-to-quarter fall in the April-June quarter. The main reason for this is that production of IT-related items has been decreasing due to fewer exports.

Industrial production is expected to fall in July and rise in August. There is concern over the prospects of industrial production that inventories, especially of producer goods such as chemicals and steel, increased in the April-June quarter, although inventories of IT-related items decreased.

On the other hand, tertiary industry activities have remained on a broadly unchanged trend.

Corporate profits have leveled off. Business sentiments are deteriorating sharply, especially in manufacturing industries. The number of bankrupt companies is rather high.

Corporate profits have been improving since 1999 and they have been improving greatly, especially since mid-2000. The first reason for this improvement is corporations' efforts to restructure their business and the second and third reasons, which are also strong reasons, are that sales in manufacturing industries have been increasing and non-manufacturing industries had been cutting non-fixed costs until early 2000. However, the Quarterly Survey of Corporate Enterprises shows that ordinary profits in the January-March 2001 period remained at the same level on a year-on-year basis and the BOJ's tankan survey predicts that corporate profits will slow down in the first half of fiscal 2001. According to the Business and Investment Survey of Incorporated Enterprises, the large and medium-sized firms forecasting a decline in their ordinary profits for the April-June quarter outnumbered those forecasting an increase by a greater margin.

The tankan survey says business sentiments of large and non-manufacturing firms have remained unchanged but those of manufacturing firms, especially of electrical machinery, have been deteriorating sharply. According to the Business and Investment Survey of Incorporated Enterprises, business sentiments of both manufacturing and non-manufacturing industries have deteriorated.

According to Tokyo Shoko Research Ltd., 1,510 companies went bankrupt in May, which was a rather high level.

The employment situation remains severe, with the unemployment rate staying at an all-time high and the number of job offers and overtime hours worked are edging down.

The unemployment rate in June stayed at an all-time high of 4.9%, the same level as in the previous month.

There are other signs that show the employment situation is deteriorating. The number of new job offers as a whole decreased in June (down 1.1% from a year earlier) as the margin of the decrease in the manufacturing industries was greater. It also posted a decrease on a month-to-month basis (down 6.8% from May). Overtime work hours in the manufacturing industries decreased for 8 consecutive months on a month-to-month basis. Although the number of employees remained unchanged, the number of people in the workforce has decreased due to a decline in the number of self-employed and family workers.

3. Prices and the financial market

Domestic Wholesale Prices and Consumer Prices are both declining slightly.

Import Prices have been rising on a yen basis due to the yen's depreciation, although they fell on a contractual currency basis. Domestic Wholesale Prices have been declining slightly since the beginning of 2001. Recently, prices of petroleum & coal products have increased but those of Electrical machinery and Transportation equipment have decreased. The corporate service price index has continued to decline from a year earlier.

Consumer Prices have been declining slightly since the fall of 2000. Although general service prices rose slightly from a year earlier as the effect of a price-down of eating out had run its course, commodity product prices declined due to sharper declines in the prices of textile products and smaller rises in the prices of oil products.

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

The financial market : the stock market, which had been on a downtrend since the spring of last year, declined further in July.

Looking at the short-term interest rates, overnight rates moved at 0.01-0.02% in July, reflecting the Bank of Japan's monetary easing policy. 2- and 3-month contracts moved laterally in July, after having remained on a downward trend since the beginning of this year. Long-term interest rates rose, reflecting in part the market concern over the worsening supply-demand situation of government bonds, after having been on a downward trend since the last fall.

The stock market has been on a falling trend since the spring of last year. Although it turned upward temporarily from late April to early May, the stock market declined further in July, reflecting in part the market concern over worsening corporate performance.

On the exchange market, the yen had been on a downward trend against the dollar since June and depreciated to the 126 level in early July before moving sideways. Against the Euro, the yen fell to the 109 level in July after rising sharply to the 100 yen level from late May to early June.

While M2 + CDs (monthly average balance) had been growing 2.0% on a year-on-year basis since the second half of last year, its growth rate has been accelerating slightly since the beginning of this year, reflecting the shift of funds from postal savings and so on (July preliminary report: up 3.3% over a year earlier). The total amount of loans provided by private financial institutions (average balance of all loans) has been decreasing on a year-on-year basis since the fall of 1996. It remains at a low level, reflecting corporations' slow demand for funds and so on. Interest rates on bank loans have been on a falling trend since the beginning of this year, reflecting easier monetary policies.

4. Overseas economy

The U.S. economy is weak, while in Asia the economy is slowing down.

The world economy as a whole is slowing down its growth.

In the U.S., domestic demand is growing at a moderate pace as private consumption is moving steadily and housing investment is rising, although firms restrain capital spending significantly due to worsening corporate profits. Amid the continuing inventory adjustment, manufacturing activities are slowing down, pushing capacity utilization down. Employment is falling mainly in manufacturing and the unemployment rate is on a rising trend. The U.S. economy is now weak. While possible effects of the income tax cuts are drawing attention, there are concerns over the prospects such as worsening corporate profits and a declining capacity utilization rate.

In Europe, the pace of economic expansion has been slowing down in Germany. In France, stable economic growth is continuing, while its business prospects are worsening. In the U.K., the pace of economic expansion has been slowing down.

In Asia, the pace of economic growth is slowing down slightly in China due to the deceleration of export growth, although personal consumption and fixed asset investment are steady. South Korea's economy is slowing down, because industrial production and exports have slowed.

As for the international financial situation, Argentina has adopted a policy to cut fiscal spending due to financial instability caused by concerns about deteriorating fiscal conditions. In the U.K., the official interest rate was lowered by a quarter percentage point to 5.00% on August 2nd.

As for movements in the international commodity market, crude oil prices, which had been on a downward trend, picked up after OPEC's decision to cut output on July 25.