Monthly Economic Report (September 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 certain sectors.

The unemployment rate has risen to an ever-highest 5 per cent level, and job offers and overtime hours worked are edging down.

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

Short-term prospects involve some concerns, such as the further slowdown of the world economy and the high level of inventories-to-shipments ratio.

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". It will formulate "Advanced Reform Program" containing measures to be decided and implemented in advance in order to carry out structural reforms vigorously and swiftly, and will also formulate the supplementary Fiscal 2001 budget.

The Bank of Japan, on August 14th, changed the guideline for money market operations with the outstanding balance of current accounts held at the Bank of Japan raised to around 6 trillion yen, and outright purchase of long-term government bonds increased to 600 billion yen per month.

Detailed explanations

1. Demand trends such as consumption and investment

Real GDP (Gross Domestic Product) in the second quarter of 2001 was 0.8% (at an annual rate of 3.2%) lower than in the previous quarter, despite the growth of Private Consumption, mainly because of the negative growths of Non-residential Investment, and Residential Investment. Nominal GDP in the second quarter of 2001 was 2.7% lower than in the previous quarter.

Although personal consumption has remained broadly flat, it shows signs of weakness in some sectors.

The Synthetic Consumption Index has been declining recently.

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

Sales statistics show that retail sales and chain store sales still have a weak tone. Department store sales posted a year-on-year decrease partly in reaction to the earlier implementation of summer clearance sales and mid-summer gift sales campaigns.

As for durable consumer goods, auto sales are increasing sharply over a year earlier on the strength of brisk sales 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 showed a strong performance, with travel abroad posting a year-on-year decrease and domestic travel being better than a year earlier.

In terms of such movement on both the demand and supply sides, personal consumption shows signs of weakness in some sectors, 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 remained flat due to an increase in special cash earnings.

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 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 the 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 July came to an annual rate of 1.227 million units, rebounding to the level of more than 1.2 million units thanks to a sharp month-to-month increase in starts of houses for sale.

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 increased over a year earlier and the total amount of orders received by 50 major companies were close to the level of 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 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 downward pressure on Japanese exports.

Imports, especially of machinery equipment such as semiconductors and other electronic parts have 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 also 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

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

Industrial production decreased in July after posting a sharp decrease for two consecutive quarters this 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 rise in August and fall in September. 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.

Corporate profits have leveled off, with manufacturing industries, especially electric machinery, posting smaller profits. Business sentiment is deteriorating sharply, especially in manufacturing industries. 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, and according to the Bank of Japan short-term business sentiment (tankan) survey, all industries are expected to see their profits to decline for the first half of fiscal 2001.

The BOJ tankan survey says the 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., 1,534 companies went bankrupt in July, which was a rather high level.

The employment situation remains severe, with the unemployment rate rising to the 5% level for the first time and the number of job offers and overtime hours worked edging down.

The unemployment rate in July rose 0.1% over the preceding month to hit an all-time high of 5.0%.

There are other signs that show the employment situation is deteriorating. Both the new job offer ratio to applications and the effective job offer ratio decreased from the previous month due to a sharp increase in the number of job seekers, although the number of job offers increased both on a month-to-month and year-on-year basis. Overtime work hours in the manufacturing industries decreased for 9 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 business establishments that implemented employment adjustment, such as "overtime restrictions," increased in the April-June quarter.

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 service prices remained unchanged from a year earlier as the effect of a decrease in price of Eating out had run its course, commodity product prices declined due to a fall in the prices of Durable goods. (The Consumer Price Index was revised to the 2000-base. As a result, the year-on-year declining rates since the beginning of 2001 expanded by about 0.3 percentage point from those of the 1995-base.)

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 July.

As for short-term interest rates, overnight rates moved at around 0.01% in August, reflecting the Bank of Japan's monetary easing policy. Two- and three-month contracts, which had continued to move at a low level since April, fell further in August, reflecting the BOJ's additional monetary easing measures. 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 spring of last year. Although it turned upward temporarily from mid-March to early May, the stock market declined further in July and early August, reflecting in part the market concerns 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 turning upward and rising to the 118 yen level in late August. Against the Euro, the yen moved at the 108-110 level in August after appreciating to the 109 yen level from June to July.

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' 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 rising. 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 decreasing exports.

In Europe, the economy is 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 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, stock prices are developing their downward trend on a global scale. From July to mid-August, the dollar slightly corrected the upward trend that had been seen since the beginning of the year. Both in the U.S. and the Euro area interest rate cuts by a quarter percentage point are decided on August 21 and 30, respectively.

As for movements in the international commodity market, the CRB commodity futures index fell below 200 points for the first time in 22 months, reflecting a decline in demand caused by the slowdown of the world economy.