Monthly Economic Report (November 2001)

Assessment of the current state of the Japanese Economy

The economy is deteriorating further.

Private consumption is weakening.

The unemployment rate has risen to a new record high, and job offers, overtime hours worked, and wages continue to weaken.

Exports and industrial production have been falling substantially, and corporate profits and business investment are declining as well.

As for short-term prospects, concerns have intensified over a simultaneous slowdown of the world economy, with the adverse effects of the series of terrorist attacks in the United States.

Policy stance

The Government, based on "Basic Policies for Macroeconomic Management and Structural Reform of the Japanese Economy," formulated the "Reform Timetable" which indicates the process of reform. It also formulated the "Advanced Reform Program" on October 26th, which contains measures to be decided and implemented in advance in order to carry out structural reforms vigorously and swiftly, and is to endeavor after an early implementation of the Program. Subsequently, the Government submitted the Revised FY2001 Budget to the Diet on November 9th. In addition to carrying out these measures, the Government has been continuously monitoring and analysing developments both at home and abroad, and studying in advance possible new policy responses to changing situations, including promotion of structural reforms, at the Council on Economic and Fiscal Policy (CEFP).

Detailed explanations

1. Demand trends such as consumption and investment

Personal consumption is weakening.

The Synthetic Consumption Index has continued to show some weakness in recent months.

Looking at the Family Income and Expenditure Survey, which is a demand-side indicator, real consumption expenses continue to be weak recently, posting a month-to-month fall in September.

Sales statistics show that retail sales and chain store sales still have a weak tone. Department store sales picked up from a year earlier, as sales of autumn clothing increased.

As for durable consumer goods, auto sales continue to be weak as orders for new models, which had been brisk until recently, posted a year-on-year decline. Home appliance sales continued to be weak due in part to a continued large decrease in personal computer sales.

Travel expenses decreased, with overseas travel posting a sharp decrease and domestic travel also posting a year-on-year decrease.

In terms of such movement on both the demand and supply sides, personal consumption is weakening.

As for the movement of household income, which has a large impact on the movement of personal consumption, contractual cash earnings continued to be smaller than a year earlier. Cash earnings continued to decrease from a year earlier.

Consumer confidence has been weakening due to the deterioration of the employment situation.

The worsening trend in consumer confidence and the sharp decrease in overseas travel may have something to do with the series of terrorist attacks in the United States.

Business investment is decreasing.

Business investment, which had been on the increase in 2000 and a supporting factor for the economy, hit a ceiling after the turn of the year and has decreased recently due partly to a slowdown in production and a decline in corporate earnings. The Quarterly Survey of Corporate Enterprises shows that business investment decreased in the April-June quarter. 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 July-September quarter decreased. Shipment of capital goods, which is a reference indicator of machinery equipment investment, has been decreasing 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, has remained on a decreasing trend since the January-March quarter and is expected to post a decrease in the October-December quarter.

Housing investment remains broadly flat.

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 the fact that consumer sentiment to acquire houses has been declining due to the severe employment and income environments and a long-term downward trend of real estate prices that has weakened replacement demand. Housing construction in the July-September quarter came to an annual rate of more than 1.2 million units due to a sharp increase in condominium starts.

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

Public investment has been generally sluggish.

Public investment has been generally sluggish. 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.

Reflecting the situation, the contracted amount of public works in the July-September quarter continued to be lower on a year-on-year basis. A year-on-year decline on a quarterly basis has been continuing for two and a half years. Orders received by 50 major companies have posted a year-on-year decrease for three consecutive quarters. But the magnitude of decline shrank in comparison with the January-March and April-June quarters.

In view of the decreasing trend of local governments' investment expenses, public investment is likely to continue to post a year-on-year decrease in the October-December quarter.

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

Against the backdrop of a slowdown of the world economy, exports have decreased for Asia and the EU, as exports of electrical devices and general machinery decreased. Exports to the U.S. decreased on the whole, although automobile exports increased. As concerns about the adverse effects of the series of terrorist attacks in the United States on the world economy have intensified, if the slowdown of the world economy continues for a long period, it is likely to put further downward pressure on Japanese exports.

Imports have decreased sharply, reflecting weak domestic demand. By item, imports of machinery equipment such as IT-related goods have posted a sharp decrease. By region, imports from the U.S., especially of machinery equipment, have decreased sharply. Imports from Asia have been on a downward trend, as imports from China have levelled off.Imports from EU have been on downward trend.

Looking at the international balance of payments, the surplus in the trade and services account has remained broadly flat as both exports and imports decreased sharply.

2.Corporate activities and employment

Industrial production has decreased sharply and the inventory/shipments ratio has remained at a high level.

Industrial production has posted a sharp decrease for three consecutive quarters since the turn of the year. The one reason for this is that production of IT-related items has been decreasing due to fewer exports.

Industrial production is expected to fall in October and rise in November. There is concern over the prospects of industrial production as the inventory/shipments ratio remains at a high level, although inventories decreased.

On the other hand, tertiary industry activities have remained largely unchanged.

As for agricultural production, the rice crop is "slightly better."

Corporate profits have decreased. Firms' judgement on current business conditions has deteriorated substantially, especially in the manufacturing sector. The number of bankrupt companies is considerably high.

According to the Quarterly Survey of Corporate Enterprises, corporate profits as a whole have hit a ceiling partly due to an increase in personnel expenses and a smaller increase in sales, although they had been improving since 1999. Manufacturing industries, especially electric machinery, posted smaller profits in the April-June quarter. According to the Bank of Japan short-term business sentiment (tankan) survey, industries as a whole are expected to see their profits decline for the whole of the fiscal year 2001, as they now forecast a decline in profit in the second half, contrary to an earlier projection of higher profits. 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 July-September quarter outnumbered those forecasting an increase by a greater margin.

The BOJ Tankan survey says the business sentiments of large and medium-sized manufacturing firms, not only of processing industries such as electric machinery but also of basic material industries such as steel and chemical, 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., 1,592 companies went bankrupt in September, which was a rather high level.

The employment situation has become increasingly severe, with the unemployment rate rising to an all-time high and the number of job offers, overtime hours worked and wages continuing to weaken.

The unemployment rate in September rose 0.3% over the preceding month to hit an all-time high of 5.3%. This is due to a decrease in the number of employees, except in the service industry, and a sharp increase in the number of the unemployed. As for the unemployed, the number of involuntary job leavers has increased, in addition to the number of voluntary job leavers that has been increasing recently.

The number of new job offers increased both from a year earlier and from the preceding month. Overtime work hours in the manufacturing industries decreased for 11 consecutive months on a month-to-month basis. The ratio of those who have been out of work for more than one year to the unemployed has been on a rising trend. As seen from the above, the employment situation has become increasingly severe.

Wages continued edging down, with total cash earnings and contractual cash earnings continued to decrease from a year earlier.

3.Prices and the financial market

Domestic Wholesale Prices and Consumer Prices are both declining slightly.

Import Prices have been falling both on a yen basis and on a contractual currency basis. Domestic Wholesale Prices have been declining slightly since the beginning of 2001. Recently, the margin of price decline has expanded slightly, as prices of Electrical machinery and Chemicals have decreased, reflecting technological innovation and a slowdown in demand. 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 services remained flat, Commodities declined due to a fall in the prices of Durable goods.

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

Financial market : In October, the stock market rose to the level of before the terrorist attacks in the United States.

Looking at the short-time interest rates, the overnight call rate moved at 0.002-0.003% in October, reflecting Bank of Japan's monetary easing policy. Two- and three-month contracts, which had continued to move at a low level since April, remained flat in October. Long-term interest rates rose in July and early August but then moved sideways, after having been on a downward trend since last fall.

The stock market has been on a downtrend since the spring of the last year. The stock market declined further in September due partly to the terrorist attacks in the United States. In October, the stock market rose to the level before the terrorist attacks, reflecting stock price movements in the United States.

On the exchange market, the yen depreciated to the 123 yen level at one stage late in October but moved at the 121-122 yen level thereafter, after appreciating to the 117 yen level in late in September. Against the Euro, the yen moved at the 109-111 level in October after depreciating to the 109 yen level from June to July.

The M2+CDs (monthly average balance) had been growing by 2.0% on a year-on-year basis since the second half of last year and its growth rate has been accelerating slightly since the beginning of this year, reflecting the shift of funds from postal savings and so on (October preliminary report: up 3.6% 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' weak 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 economies

The world economy has been slowing down simultaneously.

The world economy has slowing down simultaneously.

The U.S. economy is now weak and there are concerns that it may fall into recession. Private consumption has remained weaker than before the terrorist attacks, although the direct impact of the attacks has receded. Consumer confidence has declined substantially. Domestic demand is decreasing as housing investment has levelled off and capital spending continues to decrease sharply. Amid the continuing inventory adjustment, manufacturing activities are slowing down, pushing capacity utilization down. Employment is falling substantially and the unemployment rate is rising rapidly.

In Europe, the economy is slowing down in Germany. In France, the pace of economic expansion has been decelerating. In the U.K., the economy is expanding moderately.

In Asia, the pace of economic growth has been slowing down in China in recent months 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, both the dollar and stock prices eased slightly late in October, after staying firm earlier in the month. The target range of short-term interest rates in the U.S. was lowered by 0.50 percentage points to 2.00% at the Federal Open Market Committee meeting held on November 6. As a result, the federal funds rate has dropped to its lowest level since September 1961. In the Euro area and the U.K., the official interest rates were also lowered by 0.50 percentage points respectively.

As for movements in the international commodity market, crude oil prices remained on a downward trend, reflecting concerns that the slowdown of the world economy would cause a decline in demand.