Assessment of the current state of the Japanese economy

The economy is deteriorating.

Private consumption has remained broadly flat, with some weakness in recent months. The unemployment rate has hovered at high levels.

Exports and industrial production continue to decline.

Corporate profits are slowing down,and business investment has flattened.

Short-term prospects involve some concerns,such as increases in business inventories and signs of weaker business investment.

Policy stance

The Government is to formulate "Basic Policy for Future Economic and Fiscal Management and Structural Reforms of Economy Society" (tentative name) at the Council on Economic And Fiscal Policy by end-June, and is to carry out resolutely ceaseless economic and fiscal structural reforms including final disposal of non-performing loans, creation of competitive economic system that is appropriate for the environment of the 21st century, and fiscal structural reforms.

Detailed explanations

1.Demand trends such as consumption and investment

The growth rate of Real GDP (Gross Domestic Product) in the first quarter of 2001 was down 0.2% from the previous period (down 0.8% for the year), despite the growth of Public Investment, mainly because of the negative growths of Non-residential Investment, Residential Investment and Net Exports of Goods & Services. Nominal GDP was 0.6% higher than in the previous quarter.

Real GDP growth rate in the fiscal year of 2000 was up 0.9%.

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

Looking at the Family Income and Expenditure Survey, which is a statistic of the demand side, the real consumption expenses, which had turned to decrease in March 2001, has decreased for two consecutive months although at a smaller decrease than last month.

The Synthetic Consumption Index (demand-side) for estimating macroeconomic consumption trends which, based on the Family Income and Expenditure Survey, excludes the volatile expensive consumption and uses supply-side statistics as well shows a decrease for two months straight, although it is a smaller decrease than last month, indicating signs of recent weakness.

Sales statistics shows that retail sales, which had shown improvement, have been falling. Although department stores show good signs due to, for example, the extension of business hours, the sales of department stores and chain stores have remained weak.

Looking at durable consumer goods, home appliance sales, which had been strong partly due to the rush demand before the enforcement of the Home Appliances Recycling Law, has fallen below the previous year's level because of such factors as a large decrease in personal computer sales. Meanwhile, there was no expected reactionary decrease of the rush demand, partly owing to the adding up of a part of the March sales. Although auto sales in May were higher than last year due to longer business days, it remains at a low level.

Although domestic travel was better than last year, travel abroad decreased, showing a continued general sense of slowing down.

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, although cash earnings has increased just a little due to the increase in special cash earnings, contractual cash earnings decreased for the forth consecutive month, showing continued weakness.

Business investment has hit a ceiling. Looking at industries, although business investment of the manufacturing industries has been increasing steadily, that of the non-manufacturing industries has been rather weak.

Business investment has been on the increase trend since it turned to recovery in 1999 and has been a supporting factor of the economy. However, the Quarterly Survey of Corporate Enterprises shows that, in the January-March period, although business investment of the manufacturing industries increased steadily, that of the non-manufacturing industries decreased on a year-on-year basis, causing the total business investment to hit a ceiling. Shipment of capital goods which is a reference indicator of machinery equipment investment has been weak recently.

There are signs of weakness in the future business investment, seeing that business investment in fiscal 2001, especially in the non-manufacturing industries, is expected to decrease in the BOJ's Short-term Economic Survey and that 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 constructions is in a weak tone.

Although approximately 1.2 million units have been constructed each year since 1999, housing construction has been weak recently. After decreasing for two consecutive months, January and February, it recovered to a normal level in March. But, since owned houses, rented houses and condominiums all decreased from the previous month in April including publicly-financed owned houses which decreased about 19% from the previous month, the annual rate of housing construction was 1.137 million units.

Factors which decrease housing construction are observed. For example, the number of applications for the housing finance by the House Loan Corporation has fallen.

Public investmenthas been generally sluggish.

Public investment has been generally sluggish. The government's public investment-related budget in fiscal 2000 was smaller than that in the previous year when the Government's revised budget was comparatively high, and local governments have continued to curb investment expenses because of their tight financial positions. Reflecting such a situation, the contracted amount of public works based on the guarantee contracts of advanced payment had continued to be smaller on a year-on-year basis from June 2000 to March 2001. There were also some indicators that a large decrease from the previous year in the orders received in the January-March period when many fiscal-year-end orders are submitted.

In a new fiscal year, in April 50 major companies received a larger total amount of orders than in the previous year, and the contracted amount of public works exceeded that of the same month in the previous year. However, it is possible that in the previous year many orders were given in May, greatly pushing down the order amount of April. We should also note that the sizes of the orders given at the start of a new fiscal year were comparatively small and tend to make the year-on-year comparison volatile.

Public investment in the April-June period is not expected to drop much below the previous year's level as in the January-March period since the Governments' public works-related spending in the initial budget was maintained at almost the same level as the previous year and the amount of curtailed investment expenses of the local governments was smaller than the previous year.

Bothexports and imports have been decreasing. The surplus in the trade and services balance has remained broadly flat.

Against the backdrop of a slowdown of the U.S. and Asian economies, exports, especially of electrical devices such as electronic parts (ICs etc.) have decreased for all regions of Asia, the U.S. and the E.U.

Imports, especially of IT-related goods such as electronic pats (ICs etc.) have also decreased, reflecting lower demand for IT-related goods. Imports from the NIEs, especially of machinery equipment, have decreased, making the total imports from Asia a little weaker. Imports from the U.S. and the E.U. have decreased recently.

Looking at the international balance of payments, the surplus in the trade and services balance, which had been decreasing due to smaller exports since last fall, have recently remained broadly flat.

2. Corporate activities and employment

While industrial production continues to decrease, inventories have increased

Although production in the mining and manufacturing industries had continued its rising trend since the early days of a recovery in early 1999, its increasing pace started to lose momentum at around the fall of 2000 and it has been decreasing since the beginning of this year. The main reason for this is that production of IT-related items has been decreasing due to their fewer exports.

Industrial production is expected to rise in May and fall in June. However, we should note that if it follows this expected course of rise and fall, industrial production in the April-June period will decline from the preceding quarter. Furthermore, there is concern over the prospects of industrial production that inventories, especially of producer goods such as electronic parts, chemicals and steel, have been increasing.

On the other hand, the tertiary industries, especially service industries, have been increasing slowly for these months.

Corporate profits are slowing down and 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 especially since mid-2000, they have been improving greatly. The first reason for this improvement is corporations' efforts to restructure their business and the second and third, 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 BOJ's Short-term Economic Survey predicts that corporate profits will slow down over the period from the second half of 2000 through the first half of 2001 and 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.

The Short-term Economic Survey says business sentiments of all segments, large or small-and-medium, manufacturing or non-manufacturing, have been deteriorating. Those of manufacturing industries, especially of electrical machinery, have been deteriorating sharply. The Survey of "Business and Investment Survey of Incorporated Enterprises" shows that the business sentiments of both manufacturing and non-manufacturing industries have been deteriorating.

According to Tokyo Shoko Research, 1,575 companies went bankrupt in April, which was a rather high level.

The Employment situation remains severe. The unemployment rate has stayed at a high level and the number of job offers and overtime hours worked are decreasing.

The unemployment rate in April was 4.8%, up 0.1% from the previous month.

There are concerns over the prospects of employment situation. Although the number of new job offers increased in April (up 4.9% from the previous month) after decreasing for the third consecutive month since January, the basic tone remains weak. Reflecting the trend of production, overtime hours worked in the manufacturing industries have been decreasing from the previous month for 6 consecutive months. The percentage of companies that effected employment adjustment such as overtime-work limitation in the January-March period rose slightly.

3. Prices and the financial market

Domestic wholesale prices and consumer prices are both declining slightly.

Domestic wholesale prices have been declining slightly since the beginning of 2001 because of the price decreases of electrical machinery, steel and so on. Although domestic wholesale prices were unchanged in May, basically, they have been falling: a rise in the prices of Edible agricultural, livestock & fishery products is seasonal, and the prices of electrical machinery and transportation equipment have kept decreasing. Export prices (in yen terms) fell as a result of the yen's appreciation along with a fall of electrical machinery on a contractual currency basis. Import prices (in yen terms) fell as a result of the yen's appreciation along with a fall of machinery & equipment 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 because of the price decrease of textile products (the composite index, excluding perishables, was down 0.5% in April from the previous year.). Consumer prices in the 23 wards of Tokyo in May declined at the same pace as in April (the composite index, excluding perishables, in May was down 0.9% 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.

The financial market: short-term interest rates have been continuing a falling trend since the beginning of this year, reflecting the BOJ's money-supply relaxation measure and so on.

Looking at the short-term interest rates, overnight rates were generally at the 0.01% level in May, reflecting the penetration into the market of the BOJ's money-supply relaxation measure. The same measure has kept the interest rates of 2-3 months on the decrease. Due in part to the market's concern over the economy's prospects, long-term interest rates had been maintaining a falling trend since last fall, until they reached the 1.0% level in March. Although they picked up for a while thereafter, they fell again. They remained at the same level in May.

The stock market had been on a falling trend since the spring of last year, until it turned to an upturn in mid-March. After rising from the end of April through early May against the backdrop of the rising expectations for the Government's structural reforms and the firm moves of the U.S. stock prices, it fell gradually toward the end of May.

In the exchange market, the yen had continued falling against the dollar since the end of last year. After staying in a narrow range of 121 to 123 yen against the dollar over early and mid-May, the yen rose to the 119 level in late May, pushed up by a cheap Euro. The Euro had been the only currency to rise since the end of last year. After the yen moved in a range of 107 to 110 against the Euro in early and mid-May, it rose sharply to the 102 level in late May.

While M2 + CD (monthly average balance) had been generally on a increase of 2.0% on a year-on-year basis since the second half of last year, its growth rate has been accelerating just slightly since the beginning of this year, reflecting the shift of funds from the postal savings and so on (temporary figure in May: up 2.9% on the year-on-year basis). The total amount of the loans provided by the 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 the corporations' low demand for funds and so on. Although interest rates on bank loans had been rising slowly after the cancellation of the zero interest-rate policy, they have been on a falling trend since the beginning of this year.

4. Economy overseas

The U.S economy is weak while business expansion pace is slowing down in Asia

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

In the U.S., solid movements are seen in private consumption and housing investment, and the fall of consumer sentiment shows signs of coming to a halt. Meanwhile, domestic demand is growing only at a moderate pace, as corporations restrain capital spending due to worsening corporate profits. Amid the continuing inventory adjustment, manufacturing activities are slowing down. Employment is failing mainly in manufacturing and the unemployment rate is a rising trend. The U.S. economy is now weak. There is concern that its present weakness will continue due to factors such as worsening corporate profits. Meanwhile, a 1.35 trillion tax cut over 10 years became law on June 7. Most of tax rebate will be completed by the end of September.

In Europe, the economy of Germany has slowed in the pace of expansion. In France, stable economic growth is continuing, while its business prospects is worsening. In the U.K., the economy is expanding moderately.

In Asia, the pace of economic growth is rising slightly in China, supported by the steady movements of personal consumption and fixed asset investment. South Korea's economy is slowing down, because industrial production and private consumption as well as exports have slowed.

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 4.00% at the Federal Open Market Committee on May 15. In Europe, the European Central Bank (ECB) lowered the official interest rate (the minimum bid rate on the main refinancing operations) by a quarter percentage point to 4.50% on May 10. In the UK, the official interest rate was lowered by a quarter percentage point to 5.25% on the same day.

As for movements in the international commodity market, crude oil prices rose ahead of a seasonal rise in demand for gasoline in the summer.