Monthly Economic Report (October 2001)

Assessment of the current state of the Japanese Economy

The economy continues to deteriorate.

Private consumption has remained broadly flat, with some weakness in recent months. The unemployment rate stays at the ever-highest level.

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

Firms' judgement on current business conditions has deteriorated substantially, especially in the manufacturing sector.

As for short-term prospects, concerns have intensified, such as adverse effects of the series of terrorist attacks in the United States on the world economy.

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 will also formulate the "Advanced Reform Program" by end-October, which contains measures to be decided and implemented in advance in order to carry out structural reforms vigorously and swiftly, and will formulate the supplementary Fiscal 2001 budget.

The Bank of Japan, with the view to maintaining stability in the financial markets and to permeating monetary easing effects, decided on September 18th, to aim at maintaining the outstanding balance of current accounts held at the Bank of Japan at above 6 trillion yen, and to reduce the official discount rate by 0.15 percentage points to 0.10 per cent.

Detailed explanations

1. Demand trends such as consumption and investment

Although personal consumption has remained broadly flat, it shows signs of weakness in recent months.

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 August.

Sales statistics show that retail sales, chain store sales and department store sales still have a weak tone.

As for durable consumer goods, auto sales have turned 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 continued to show a strong performance, with both domestic travel and overseas travel posting a year-on-year increase. There are concerns that overseas travel may post a sharp decrease in September and beyond due to the series of terrorist attacks in the United States.

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

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 decreased substantially from a year earlier.

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. 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 July-September 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 have weakened replacement demand. Housing construction in July and August came to an annual rate of more than 1.2 million units, due to increases in starts of condominiums and houses for rent.

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. 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.

Reflecting the situation, the total amount of orders received and contracts concluded in the April-June quarter decreased from a year earlier. But contracts concluded in July and the total amount of orders received by 50 major companies in August both posted increases over a year earlier, shrinking the magnitude of decline.

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 electrical devices and general machinery decreased sharply. If the slowdown of the world economy continues for a long time due to the series of terrorist attacks in the United States, it is likely to put downward pressure on Japanese exports.

Imports have decreased, reflecting weak domestic demand by item, imports of machinery equipment such as semiconductors and other electronic parts have decreased. By region, imports from the U.S. and the EU, especially of machinery equipment, have been weak. Imports from Asia have been on a downward trend, as imports from China have levelled off.

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

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

Industrial production has posted a sharp decrease since the turn of the year. 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 September and rise in October. There is concern over the prospects of industrial production as the inventory/shipments ratio remains at a high level, although inventories, especially of IT-related items, 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, both manufacturing and non-manufacturing industries are expected to see their profits decline for the first half of fiscal 2001. Contrary to an earlier projection of higher profits in the second half of fiscal 2001, industries as a whole are expected to see their profits decline in the second half and for the whole of the fiscal year.

The BOJ tankan survey says the business sentiments of large and 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 Tokyo Shoko Research, Ltd., 1,544 companies went bankrupt in August, 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 edging down.

The unemployment rate in August stayed at an all-time high of 5.0%, 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 August (down 3.9% 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 3.8% from July). Overtime work hours in the manufacturing industries decreased for 10 consecutive months on a month-to-month basis. Although the number of employees on the whole remained almost unchanged, the number of people employed in manufacturing industries decreased slightly. The number of corporations saying they have excess employees has been increasing, especially among medium- and large-sized manufacturers.

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, prices of Petroleum & coal products have increased but those of Electrical machinery and Nonferrous metals 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 services were slightly higher than in the previous year due to a slower decline in Personal services, 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: the stock market declined further in and after July.

Short-term interest rates remained broadly flat due mainly to an ample supply of liquidity by the Bank of Japan following the series of terrorist attacks in the United States on September 11. Overnight call rates moved at 0.002-0.003% in September, reflecting a change in the interest band for the call market. Two- and three-month contracts, which had continued to move at a low level since April, remained flat in September. Long-term interest rates rose in July and early August but then moved sideways, reflecting in part the market concern over the worsening supply-demand situation of government bonds, 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. Although it turned upward temporarily from mid-March to early May, the stock market declined further in and after July, reflecting partly the market concerns over worsening corporate performance and due partly to the series of terrorist attacks in the United States.

On the exchange market, the yen had been on an upward trend against the dollar in August and but depreciated from the 118 yen level in early September to the 121 yen level temporarily in mid-September, before turning upward again to the 117-119 yen level late in the month. Against the Euro, the yen moved at the 106-109 level in September 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 (August preliminary report: up 3.4% 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

Prospects of the world economy have increased uncertainty.

The world economy is slowing down and its prospects have increased uncertainty due to the terrorist attacks in the United States.

The U.S. economy is now weak and its prospects have increased uncertainty. Private consumption is moving slower than the increase in disposable income brought about by income tax cuts. Consumer confidence has declined substantially. Domestic demand is slowing down as housing investment has levelled off and firms retain 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 and the unemployment rate is rising.

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

In Asia, the pace of economic growth is slowing down slightly in China due to the deceleration of export growth in recent months, 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, the dollar rebounded slightly after a sharp depreciation triggered by the terrorist attacks in the United States. Stock prices also rebounded slightly after falling sharply following the terrorist attacks. The central banks of major economies including the United States and the Euro area lowered their interest rates one after another following the terrorist attacks.

As for movements in the international commodity market, crude oil priced rose sharply following the terrorist attacks but later fell sharply reflecting concerns about a decline in demand worldwide.