Monthly Economic Report (April 2002)

Assessment of the current state of the Japanese economy

While the economy continues to be in a difficult situation, it is showing movements towards bottoming out.

Business investment is declining significantly. Employment situation continues to be severe with the unemployment rate being at a high level.

Private consumption is flat.

Exports and industrial production are almost bottoming out. Business sentiment of large-sized enterprises is showing signs of bottoming out.

Movements towards recovery in the U.S. economy are feeding into the recovery in production, mainly in the manufacturing sector, of the world major economies.

As for short-term prospects, there are concerns over the downward pressure on private demands that may be exerted by such factors as severe employment and wage situations. On the other hand, improvement in external conditions and progress in inventory adjustment are expected to prevent the economy from deteriorating further.

Policy stance

While taking decisive actions for structural reform, the Government is paying full attention to the prevention of the economy from falling into a deflationary spiral, and is firmly resolved, in close cooperation with the Bank of Japan, to emerge from deflation.

As the "Budget for Fiscal Year 2002" has been approved by the Diet, the Government will implement it and the supplementary budgets for the fiscal year 2001 in an integrated and seamless manner.

1.Demand trends such as consumption and investment

Personal consumption is flat.

Personal consumption, in terms of movements on both the demand and supply sides, is flat. Although increases have been seen in some businesses and expenditure items in recent months, they are not strong enough to support the economy as a whole. Behind this are the facts that income continues to decrease and consumer confidence remains at a low level.

As for the movement on the demand side, a robust movement has been seen since last autumn. The Synthetic Consumption Index posted a rise from three months before. As for the movement of each expenditure item, the Family Income and Expenditure Survey shows that relatively high-expenditure items, such as automobile purchases, housing reform and tuition, decreased along with utility bills reflecting the mild winter. On the other hand, spending on foods was robust, remaining flat from a year earlier.

Sales are weakening as a whole. Retail sales and chain store sales still have a weak tone. Home appliance sales continued to be weak due in part to a continued decrease in personal computer sales. Domestic travel increased over a year earlier but overseas travel remained sharply lower than a year earlier, although the margin of decrease narrowed. Meanwhile, department store sales, which have been moving unevenly since last summer, show signs of bottoming out on the whole, although sales in February were lower than a year earlier due to sluggish clearance sales of winter clothing caused by the mild winter. New car sales decreased from a year earlier, as sales of mini cars posted a year-to-year decline due partly to a halt in the effect of new models.

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

Consumer confidence remains severe after deteriorating sharply.

Business investment is decreasing significantly.

Business investment has been decreasing since the beginning of 2001 due partly to declines in production and corporate earnings. Financial Statements Statistics of Corporations by Industry, Quarterly, which is a demand-side indicator, shows that business investment has been decreasing since the January-March quarter of 2001 and expanded the margin of decrease in the October-December quarter. Shipment of capital goods, which is a supply-side indicator of machinery equipment investment, has been decreasing since the beginning of 2001. Software investment has been on an upward trend.

Business investment is likely to continue its decrease, as machinery orders, a leading indicator of machinery equipment investment, has remained on a decreasing trend since the January-March quarter of 2001 and is expected to have posted a decrease in the January-March quarter of 2002 and business investment in fiscal 2002, both in the manufacturing and non-manufacturing industries, is expected to decrease in the Bank of Japan short-term business sentiment survey (tankan).

Housing investment remains broadly flat.

Housing construction moved at an annual rate of 1.15-1.20 million units throughout 2001 because condominium starts, which posted a solid gain in 2000, have turned steady and because starts of publicly financed owned houses decreased sharply in and after January 2001. As a result, housing construction in 2001 decreased 4.6% from a year earlier to 1.174 million units, the first time it has fallen below 1.2 million units in three years.

Behind this lies the fact that consumer sentiment with regard to acquiring 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.

In February 2002, housing construction came to an annual rate of 1.184 million units, down 4.9% from the previous month, as starts of owned houses, houses for rent, and one-family houses posted decreases, although starts of condominiums increased. Factors that decrease housing construction are still observed. For example, the number of applications for housing financing to the Housing Loan Corporation has fallen.

Public investmenthas been generally sluggish.

Public investment has been generally sluggish. Looking at the second supplementary budget for fiscal 2001, the government's public investment-related budget, including facility expenses, for the year comes close to the same amount as in the previous fiscal year, thanks partly to special measures for "Reform-Promotion Public Investment." 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 October-December quarter continued to be lower for the 11th consecutive quarter, with orders received by 50 major companies posting a year-on-year decrease for four consecutive quarters. The margin of the decline, which had shrunk in the January-March and April-June quarters, expanded again in the October-December quarter.

In view of year-on-year declines seen in the contracted amount of public works in January and February and decreasing trend of local governments' investment expenses, public investment is likely to continue to post a year-on-year decrease in the January-March quarter.

Under the initial national budget for FY2002, public investment-related expenses, including facility expenses, are to be slashed by 10.7% from the previous fiscal year, while the seven focused areas in the "Basic Policy on Budget Compilation" are to be given priorities. Under the fiscal plans of local governments for FY2002, of the investment expenses, those for projects to be undertaken by local governments on their own funds are to be slashed by 10.0% from the previous fiscal year and a thorough review of expenditures and focused budget allocation are to be carried out in line with the national expenditure budget.

Exports has stopped decreasing. Imports remain flat. The surplus in the trade and services balance has increased slightly.

Exports has stopped decreasing as a whole, as exports of electrical devices, mainly electronic components like semiconductors, are on an increasing trend and exports of general machinery are bottoming out thanks to progress in IT-related inventory adjustment worldwide. Exports to Asia, especially of electrical devices and general machinery, increased moderately. Exports to the U.S. remained almost unchanged, as exports of general machinery and automobiles were firm. Exports to the EU have continued decreasing, reflecting sluggish domestic demand in European countries. As for the outlook for exports, the yen's recent weakness and the improvement in external conditions, such as movements of recovery in the U.S. economy, are likely to support Japanese exports, although the European economies are stagnant.

Imports as a whole moved sideways, partly due to the fact that imports of machinery equipment remained flat thanks to progress in IT-related inventory adjustment in Japan. By region, imports from Asia remained flat, as imports from China, which had contributed to an increase in Japan's imports of foods and textile products, leveled off, although imports of machinery equipment were steady. Imports from the EU remained flat. Imports from the U.S., especially of machinery equipment, have decreased.

Looking at the international balance of payments, the surplus in the trade and services account has increased slightly, as export value increased faster than import value thanks to the combined effects of the bottoming out in export volume and sideways movement of import volume.

2. Corporate activities and employment

Industrial production almost stopped decreasing.

Industrial production, which had posted a sharp decrease since the beginning of 2001, has narrowed the margin of its decrease. In view of the bottoming out in exports and progress in inventory adjustment, industrial production, especially of IT-related items, shows signs that it has stopped decreasing.

There is concern over the prospects of industrial production as business investment is expected to continue declining. Incidentally, according to the Survey of Production Forecast, industrial production is expected to rise in March and April.

Tertiary industry activities remain broadly flat.

Corporate profits have decreased sharply, especially in the manufacturing sector. Firms' judgement on current business conditions has remained severe, but large enterprises' judgement shows signs it has stopped deteriorating. The number of bankrupt companies remains at a high level.

According to Financial Statements Statistics of Corporations by Industry, Quarterly, corporate profits as a whole have hit a ceiling due partly to a slower decrease in personnel expenses since the beginning of 2001 and partly to a smaller increase in sales. But manufacturing industries, especially electric machinery, have posted a sharp decrease in profits in and after the July-September quarter as sales have also decreased. According to the Bank of Japan short-term business sentiment survey (tankan), industries as a whole, and the manufacturing industries in particular, expect a sharp decrease in their profits in the second half of fiscal 2001 but an increase in FY2002.

The BOJ tankan survey says business sentiment has remained severe. The business sentiment of small and medium-sized enterprises has remained severe but that of large enterprises shows signs it has stopped deteriorating. As for future prospects, small and medium-sized enterprises forecast further deterioration of their business, while large enterprises forecast improvement of their business.

According to Tokyo Shoko Research, Ltd., the number of corporate failures remains at a high level, with 1,674 companies going bankrupt in February.

The employment situation still remains severe, with the unemployment rate remaining at a high level and the number of job offers and wages continuing to weaken.

The unemployment rate in February remained unchanged from the previous month at 5.3%. As for the unemployed, the number of involuntary job leavers has continued increasing.

Job offers continue to show weak movement, with the number of effective job offers continuing to post a month-to-month decline and the effective job offer ratio decreasing, although the number of new job offers increased. Overtime work hours in the manufacturing industries increased in January from the previous month, reflecting the signs of bottoming out in production, but decreased slightly in February. The number of corporations saying they have excess employees remains at a high level, although it decreased among manufacturers.

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

3. Prices and the financial market

Domestic Wholesale Prices are declining at a slower pace and Consumer Prices are declining slightly.

Import Prices have been falling on a contractual currency basis but rising on a yen basis reflecting the yen's recent weakness. Domestic Wholesale Prices have been declining at a slower pace. Recently, prices have been falling by a smaller margin as prices of Nonferrous metals have been rising, the prices of Petroleum & coal products have begun to rise, and the margin of decline in the prices of Electrical machinery have narrowed due to progress in inventory adjustment, although prices of Edible agricultural, livestock & fishery products have been declining. 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 (such as Eating out) rose slightly, 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:Stock prices rose sharply from late February to early March, then fell in mid and late March. Long-term interest rates fell slightly in March.

Looking at short-term interest rates, the overnight call rate moved at 0.001-0.012% in March, reflecting the Bank of Japan's monetary easing policy. Two- and three-month contracts rose slightly after the turn of the year but declined slightly in late March due partly to the disappearance of the fiscal-year-end-book-closing factor. Long-term interest rates, which had moved sideways since mid-August of last year, rose slightly in January and then fell slightly in March.

The stock market rose sharply from late February to early March, reflecting in part the market perception that a downside risk for the moment has receded partly reflecting tighter controls on short selling, then fell in mid and late March, with the Nikkei Stock Average ending the fiscal year 2001 at 11,024 yen (the TOPIX at 1,060 points).

On the exchange market, the yen (interbank spot central rate) depreciated from the 120 yen level in mid-November to the 134 yen level in January. It appreciated to the 127 yen level in early March on the strength of a rise in stock prices, but depreciated to the 133 yen level in mid and late March. Against the Euro, the yen (interbank rate as of 17:00) depreciated from the 107 yen level in mid-November to the 118 yen level in early January. It appreciated to the 112 yen level in early March on the strength of a rise in stock prices, but depreciated to the 116 yen level in mid and late March.

The growth of the monetary base (monthly average balance) has increased at a faster pace against the background of ample fund supply by the Bank of Japan (March: Up 32.6% over a year earlier). The growth rate of M2+CDs (monthly average balance) has slightly increased recently due partly to a rise in the growth rate of liquid deposits (February preliminary report: Up 3.7% 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 firms' weak demand for funds and so forth. Interest rates on bank loans have recently remained broadly flat, after being on a falling trend since the beginning of last year, reflecting easier monetary policies. The difference in fund-raising conditions has expanded depending on a corporate borrower's credit rating, etc. According to the BOJ Tankan survey, corporate perceptions of overall financial conditions are deteriorating slightly among large, medium and smaller enterprises and perceptions of the lending stance of financial institutions are deteriorating mainly among large enterprises.

4. Overseas economies

Movements towards recovery in the U.S. economy are leading to recovery of production, mainly in the manufacturing sector, of the world's major economies.

The U.S. economy shows movements towards recovery. Private consumption has recovered. Housing construction is on a rising trend. Although business investment is decreasing sharply, orders for non-military capital goods turn to increase. Business confidence continues improving. Production is improving and capacity utilization is rising. Total employment begins to pick up, although the unemployment rate rose. Prices are stable.

In Asia, industrial production shows signs of recovery, mainly in the manufacturing sector. Although the pace of economic growth in China is slowing, production begins to improve. South Korea's economy is recovering. Production begins to improve in Taiwan and Singapore. Domestic demand shows signs of recovery in Thailand.

In Europe,(1) The Euro Area economy is stagnant, but production stopped declining. The German economy is stagnant, but production stopped declining. In France, the economy has slowed, but production shows signs of stabilizing. (2)The U.K. economy is slowing.

As for the international financial situation, the dollar depreciated against the yen in early March but then remained on an upward trend. U.S. stock prices remained on an upward trend on expectations of recovery of the U.S. economy and hit a post-terrorist attack high on March 19, before edging down later in the month. U.S. long-term interest rates rose in early March on higher stock prices and have remained flat since then.

As for the international commodity market, crude oil prices rose sharply due partly to the agreement at the OPEC general meeting on March 15 to continue the production cutback and partly to uncertainties in the Middle East.