Monthly Economic Report (March 2002)

Assessment of the current state of the Japanese economy

While the economy continues to remain in a difficult situation, signs of bottoming out can be seen in some areas.

Business investment is declining significantly.Employment situation has become increasingly severe with the unemployment rate remaining at a high level.

Private consumption is flat.

Exports are bottoming out, and industrial production is also showing signs of bottoming out.

As for short-term prospects, there are concerns over the downward pressure on private demand that may be exerted by severe employment and wage situations and corporate profit developments. 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.

On February 27, the Government compiled the Emergency Countermeasures to Deflation. It includes measures to further accelerate the disposal of non-performing loans, measures to stabilize the financial system, capital market-related measures, and countermeasures for a credit crunch faced by small and medium-sized enterprises. The Government will act promptly and appropriately in response to any changes in economic and financial conditions. The Government is also steadily implementing the supplementary budget for Fiscal Year 2001 and other measures, and will endeavour to see an early approval of the "Budget for Fiscal Year 2002" by the Diet.

On February 28, the Bank of Japan made a decision to provide more liquidity to meet a surge in demand in order to secure the financial market stability towards the end of the fiscal year. The Bank also made a decision to increase the outright purchase of long-term government bonds to one trillion yen per month.

Detailed explanations

1. Demand trends such as consumption and investment

Real GDP (Gross Domestic Product) in the fourth quarter of 2001 was 1.2% (at an annual rate of 4.5%) lower than in the previous quarter mainly because of the negative growth of Non-residential Investment, despite the growth of private Consumption. Nominal GDP was 1.2% lower than in the previous quarter.

Personal consumptionis 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 real consumption expenses as a whole increased thanks in part to an increase in spending on foods, offsetting the sharp decrease posted in December 2001.

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. New car sales increased over a year earlier thanks to a year-to-year increase in sales of mini cars due to the continued 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. Winter bonus payments decreased sharply from a year earlier.

Consumer confidence remains severe after deteriorating sharply.

Business investment is decreasing sharply.

Business investment has been decreasing since the beginning of 2001 due partly to a slowdown in production and a decline in 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 beginning 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 business investment in fiscal 2001, both in the manufacturing and non-manufacturing industries, is expected to decrease in the Bank of Japan short-term business sentiment survey (tankan) and 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.

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 January 2002, housing construction came to an annual rate of 1.245 million units, as starts of owned houses, houses for rent, and houses for sale all posted increases. However, 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 investment has 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 for the year decreased sharply from the previous year. However, the government intends to provide non-interest bearing loans in total of 2.5 trillion yen, 1.5 trillion yen for public works projects and 1 trillion yen for facility expenses. It plans to do this by implementing special measures for "Reform-Promotion Public Investment" that makes the most of the government's funds without easily resorting to an additional issuance of government bonds under the policy of restraining "government bond issuance to less than 30 trillion yen." If the special measures and facility expenses are included, the government's public investment-related budget comes 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 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 indicators such as in the contracted amount of public works in January 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.

Exportsare bottoming out. Imports remain flat. The surplus in the trade and services balance has increased slightly.

Exports are bottoming out as a whole, as exports of electrical devices remained broadly flat and exports of general machinery decreased at a slower pace thanks to progress in IT-related inventory adjustment worldwide. Exports to Asia, especially of electrical devices and general machinery, increased moderately, perhaps partly boosted by the effect of the lunar New Year. Exports to the U.S. remained almost unchanged, as exports of electrical devices and general machinery decreased at a slower pace and exports of automobiles continued to be brisk. 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 firming in the U.S. economy, are likely to support Japanese exports, although the European economies have slowed down further.

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, especially of machinery equipment, have increased. But, the recent increase in imports of foods and textile products from China may be in part temporary. Imports from the EU have increased. 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, thanks to the combined effects of the bottoming out in export volume and lower import value caused by a decline in crude oil prices.

2. Corporate activities and employment

Industrial production shows signs it has stopped decreasing and the inventory/shipment ratio has declined.

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 shows signs 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 February and decrease in March.

Tertiary industry activities remain broadly flat.

Corporate profits have decreased sharply, especially in the manufacturing sector. Firms' judgement on current business conditions has deteriorated further. 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 partly due 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 also decreased. According to the Business and Investment Survey of Incorporated Enterprises, large and medium-sized firms, especially in the manufacturing sector, forecasting a decline in their ordinary profits for the October-December quarter far outnumbered those forecasting an increase.

The Business and Investment Survey of Incorporated Enterprises also shows that business sentiments have deteriorated further. Although the sentiment has improved in some sectors, such as electrical machinery, the firms saying their sentiment has declined outnumbered those saying their sentiment has improved by a greater margin.

According to Tokyo Shoko Research, Ltd., the number of corporate failures remains at a high level, with 1,543 companies going bankrupt in January.

The employment situation has become increasingly 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 January fell 0.2% from the preceding month to 5.3%. Although the men's unemployment rate declined due to a decrease in the number of unemployed men, the total labor force of both men and women decreased, with many of them withdrawing from the labor force. As for the unemployed, the number of involuntary job leavers has continued increasing.

The number of new job offers decreased both from the preceding month and from a year earlier. Overtime work hours in the manufacturing industries increased from the preceding month, reflecting the signs of bottoming out in production. The proportion of business establishments that implemented employment adjustment, such as "overtime restrictions," increased in the October-December quarter.

Wages continued edging down, with total cash earnings and contractual cash earnings continuing to decrease from a year earlier. Special cash earnings in November through January decreased 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 decline in the prices of Petroleum & coal products came to a halt, and the margin of decline in the prices of Electrical machinery have narrowed due to progress in inventory adjustment, although prices of Chemicals have been declining reflecting a fall in crude oil prices. 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 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.

Looking at short-term interest rates, the overnight call rate moved at 0.001% in February, 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, slightly rose recently ahead of end-March book closing. Long-term interest rates, which had moved sideways since mid-August, rose slightly in January and then remained almost unchanged in February.

The stock market, which had moved broadly flat since October, declined slightly in January and early February before turning higher.

On the exchange market, the yen (interbank spot central rate), which had remained almost unchanged after depreciating to the 134 yen level against the dollar in late January from the 120 yen level in early November, moved in a range of the 132-134 yen level in February. Against the Euro, the yen (interbank rate as of 17:00), which had remained broadly flat after depreciation to the 118 yen level in early January from the 107 yen level in mid-November, moved in a range of the 114-117 yen level in February.

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 (February: Up 27.5% 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 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.

4. Overseas economies

The economy has slowed further in Europe; shows movements of firming in the U.S., and shows movements of recovery, mainly in the manufacturing sector, in Asia.

Although the economy has slowed further in Europe, there are movements of firming in the U.S. and movements of recovery in Asia, mainly in the manufacturing sector.

The U.S. economy shows movements of firming. Private consumption has improved. Housing construction is on a rising trend. Although business investment continues to decrease sharply, manufacturing orders show improvement. Business confidence has improved. Production has begun to stop declining thanks to progress in inventory adjustment in the IT-related sector. Total employment has begun to pick up. Prices declined slightly due to a fall in energy prices.

In Europe, the German economy is receding. In France, the economy has slowed further. The U.K economy is slowing.

In Asia, the pace of economic growth has been slowing in China. Prices are on a downward trend. South Korea's economy shows movements of recovery.

As for the international financial situation, the dollar remained on an upward trend in February, after having weakened slightly at the beginning. In March, the dollar depreciated slightly. U.S. stock prices remained on an upward trend on expectations of an economic recovery, while some stocks weakened reflecting in part distrust toward corporate accounting.

As for the international commodity market, crude oil prices rose slightly, due to uncertainties about the Middle East situations and expectations of a recovery of the U.S. economy.