Monthly Economic Report (November 2002)

Assessment of the current state of the Japanese economy

Movements towards an incipient recovery continue to be seen in the economy, though its pace has become more gradual.

There are signs that corporate profits are improving; and business investment is bottoming out.

While movements towards improvement can be seen in some areas, employment situation continues to be severe with the unemployment rate being at a high level.

While private consumption is flat, firmness can be observed in some areas.

Export is declining somewhat; and the pace of incipient recovery in industrial production has become more gradual.

As for short-term prospects, the economy is expected to move towards an incipient recovery. On the other hand, environment, such as concerns over the future of the U.S. and other economies and sluggishness of domestic stock prices, has become more severe, and concerns over downward pressure on final demand that may be exerted by the development has deepened.

Policy stance

In materializing at an early stage the "Basic Policy for Economic and Fiscal Policy Management and Structural Reform 2002," the Government announced the "Comprehensive Measures to Accelerate Reforms" on October 30, which includes such measures as revitalization of finance and industry through accelerated disposal of non-performing loans, acceleration of structural reforms aiming at vitalization of the economy, and expansion of safety nets. In order to further utilize and strengthen safety nets for employment and small and medium sized enterprises, necessary measures will be considered continuously taking into account the developments in tax revenue.

Also on the same day, the Bank of Japan decided, to raise the target of outstanding level of current account in the Bank to about 15-20 trillion yen, to increase the pace of purchase of long-term government bonds to 1.2 trillion yen per month, etc.. The Government and the Bank of Japan together will also continue to take powerful and comprehensive actions to emerge from deflation and to stabilize financial system.

Detailed explanations

1.Demand trends such as consumption and investment

While private consumption is flat, firmness can be observed in some areas.

Private consumption, in terms of movements on both the demand and supply sides, is flat, but firmness can be observed in some areas. Although private consumption as a whole has yet to go on an improvement trend due to continued weakness of income, increases have been seen in some businesses and expenditure items.

As for movement on the demand side, 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 the real consumption expenditure increased sharply from the previous month, as basic expenditure items remained firm and due to temporary factors.

Sales are weakening on the whole. Retail sales still have a weak tone. Chain store sales as a whole decreased from a year earlier, although foods continued to post a year-on-year increase. Department store sales as a whole decreased from a year earlier, as sales of clothing suffered a year-on-year decline due to the effect of lingering summer heat and in reaction to a sharp increase a year earlier. Bargain sales commemorating the victory in the professional baseball league were not brisk enough to raise retail sales as a whole, although they boosted sales in some sectors. New car sales increased from a year earlier, as sales of compact cars remained brisk, although sales of mini-cars decreased from a year earlier. Home appliance sales as a whole decreased from a year earlier, although sales of TVs continued to increase and the margin of decrease in personal computers narrowed. Domestic travel decreased from a year earlier, and overseas travel increased sharply in reaction to the sharp decrease a year earlier caused in part by the effects of the terrorist attacks in the United States.

Consumer confidence shows movements of an incipient recovery, but the margin of increase is small.

Business investment is bottoming out.

Business investment, which has been decreasing since the beginning of 2001, is bottoming out, as production has improved and corporate earnings have stopped declining. Financial Statements Statistics of Corporations by Industry Quarterly, which is a demand-side indicator of business investment and which had been decreasing since the January-March quarter of 2001, has been decreasing at a slower pace since the beginning of 2002. The margin of decline is larger in smaller companies than in large and medium-sized companies. According to the Business and Investment Survey of Incorporated Enterprises (with capital of 100 million yen or more), business investment (expected results) during the July-September quarter decreased. Shipment of capital goods, which is a supply-side indicator of machinery equipment investment, moved sideways. Software investment, which had been firm, has decreased slightly.

Business investment is likely to increase as machinery orders, a leading indicator of machinery equipment investment that had been on a decreasing trend since the January-March quarter of 2001, is showing signs of bottoming out and picking up. However, after it has bottomed out, business investment is expected to remain at a low level as machinery orders are expected to decrease according to the Bank of Japan short-term business sentiment survey (tankan).

Housing investment is decreasing moderately.

Housing construction in FY2001 decreased 3.3% from the preceding fiscal year to 1.173 million units, the first time it has fallen below 1.2 million units in three years. Housing construction in FY2002 has been decreasing moderately due to a decrease in the construction of new condominiums, with housing construction standing at an annual rate of 1.18 million units in the April-June quarter of 2002 and at an annual rate of 1.13 million units in the July-September quarter.

In September, housing construction came to an annual rate of 1.115 million units due to decreases in the construction of houses for rent and houses for sale, although construction of owned houses posted an increase. Factors that decrease housing construction are still observed. For example, consumer sentiment with regard to acquiring houses has been declining due to the harsh employment and income environments and the long-term downward trend of real estate prices that has weakened replacement demand.

Public investment has been generally sluggish.

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. Under the fiscal plans of local governments for FY2002, regarding the investment expenses, those for projects to be undertaken by local governments on their own funding are to be slashed by 10.0% from the previous fiscal year. This shows that both the national and local governments have conducted a thorough review of expenditures and a focused allocation of budget.

Reflecting this situation, public investment has been generally sluggish. In FY2002, although the supporting effects of the second supplementary budget of FY2001 that was carried over into the current fiscal year have been seen, public investment continued to decline compared to the previous year in the April-June and July-September quarters, respectively. However, turnover of public construction have posted a month-to-month increase for three consecutive months since July.

Exports are declining somewhat. Imports are increasing. The surplus in the trade and services balance has decreased slightly.

Exports are declining somewhat as restocking since the beginning of the year comes to a halt amid a worldwide slowdown in the growth of final demand, such as IT-related equipment, with exports, especially of electrical devices like semiconductors, posting a decrease. By region, exports to Asia and the U.S. moved sideways as a whole, as exports of electrical devices decreased slightly. Exports to the EU decreased against the background of weakening movements of incipient economic recovery in the EU. As for the outlook for exports, close monitoring is required for increasing uncertainties about the future course of the U.S. and other economies.

Imports as a whole increased, reflecting a moderate pickup in production. By region, imports from Asia, especially of metals, increased. Imports from the EU remained flat. Imports from the U.S. increased, as imports of machinery equipment such as aircraft increased. By item, imports of mineral fuels, chemical products, and metals remained firm, although imports of IT-related machinery equipment have slowed down.

Looking at the international balance of payments, the surplus in the trade and services account has decreased slightly, as import volume increased while export volume decreased slightly.

2. Corporate activities and employment

Pace of incipient recovery in Industrial production has become more gradual.

Industrial production had increased for three consecutive quarters reflecting an end in inventory adjustment. However, the pace of incipient recovery in industrial production has become more gradual, reflecting a slight declining in exports.

There is concern over the prospects of industrial production as uncertainties surrounding the future of the world economy have further increased. Incidentally, according to the Survey of Production Forecast, industrial production is expected to rise in October but fall in November.

Tertiary industry activities remain broadly flat.

As for agricultural production, the rice crop is "average."

Corporate profits show signs of improvement. Firms' judgement on current business conditions is improving, but the pace of improvement is moderate. The number of bankrupt companies remains at a high level.

According to Financial Statements Statistics of Corporations by Industry, Quarterly, corporate profits, which had posted a sharp decrease in and after the July-September quarter of 2001, especially in the manufacturing industries, such as electric machinery, decreased at a slower pace in the January-March quarter of 2002 and the margin of decrease remained flat in the April-June quarter of 2002. According to the Bank of Japan short-term business sentiment survey (tankan), industries as a whole expect their profits to decline slightly in the first half of FY2002, but to increase sharply in the second half.

The BOJ tankan survey says business sentiment of enterprises has been improving after hitting bottom in the March 2002 survey, but the pace of improvement has become moderate, with the September survey showing only a slight improvement. Business sentiment of small and medium-sized enterprises has remained severe and at low levels. As for future prospects, all enterprises forecast a slight improvement. According to the Business and Investment Survey of Incorporated Enterprises, the width of large and medium-sized firms forecasting deterioration in their business sentiment outnumbered those forecasting improvement, the difference remaining flat.

According to Tokyo Shoko Research, Ltd., the number of corporate failures remains at a high level, with 1,467 companies going bankrupt in August and 4,763 in the July-September quarter.

The employment situation still remains severe. Although movements towards improvement are seen in some areas, the unemployment rate remained at a high level and wages continued to weaken.

The unemployment rate in September remained unchanged from the previous month at 5.4%. The number of involuntary job leavers, which accounts for the largest proportion of the unemployed, increased in September. The number of employees, which had shown movements of a moderate incipient recovery, mainly in part-timers and other temporary workers, decreased for two consecutive months.

The number of new job offers remained on an increasing trend. On the other hand, the number of new job seekers increased at the same time, therefore the new job offer ratio decreased from the previous month, but the effective job offer ratio increased slightly from the previous month. Overtime work hours in the manufacturing industries remained on an increasing trend in September, although they decreased slightly from the previous month.

Wages continued edging down, with contractual cash earnings continuing to decrease both on month-to-month and year-to-year bases.

3. Prices and the financial market

Both Domestic Wholesale Prices and Consumer Prices are declining slightly.

Import Prices have been rising on a contractual currency basis. On a yen basis, Import Prices have also begun to rise due to the effects of the yen's depreciation. Domestic Wholesale Prices have declined slightly. Recently, the price of Steel has been rising reflecting progress in inventory adjustments, and the prices of Electric power, gas & water and Electrical machinery declined. 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 moved sideways, General commodities declined due to sharper decline in the price of General food products and a fall in the prices of Durable goods, and the margin of decline in the prices of Public services & electricity, gas & water charges widened.

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

Financial market: Stock prices moved within 8,500-9,000 yen range (Nikkei Stock Average) after falling in early October. Long-term interest rates decline.

Short-term interest rates moved in the 0.001-0.002% range reflecting the Bank of Japan's monetary easing policy. Two- and three-month contracts moved almost sideways. Long-term interest rates, which rose to the 1.2% level in late September, moved at the 1.05~1.20% range in early October and then fell close to the 1.0% level in mid October reflecting receding concerns about an increased issuance of government bonds.

The stock market rose slightly in mid October reflecting a rise in U.S. stock prices after falling to the lowest levels since 1989 in late September and early October, and then moved within 8,500-9,000 yen range in late October.

On the exchange market, the yen (interbank spot central rate) moved at the 121~124 yen range after depreciating from the 117 yen level to the 125 yen level from early September to mid October. Against the Euro, the yen (interbank rate as of 17:00) moved at around 121 yen after depreciating from the 115 yen level to the 122 yen level from early September to mid October.

The growth of the monetary base (monthly average balance) has remained high about the 20% level against the background of ample fund supplies (the average balance of current deposits at the Bank of Japan stood at 15.2 trillion yen in October), but the growth rate has slackened. (October: Up 19.8% over a year earlier) The growth rate of M2+CDs (monthly average balance) has remained at around 3.5% (September preliminary report: Up 3.3% 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 downward trend since the beginning of last year, reflecting easing monetary policies. Enterprises' financial conditions have improved slightly and the yield spread between private bonds and government bonds has remained almost flat.

4. Overseas economies

Weak movements are appearing in the economic recovery in the U.S. and European countries, and the economic recovery in some Asian countries has become moderate.

The economic recovery in the U.S. is losing momentum. The growth of private consumption has slowed and consumer confidence has worsened sharply. Housing construction is at a high level. Although business investment, especially in machinery equipment, is showing signs of picking up, orders for non-military capital goods decreased. Production is decreasing. Employment is leveling off. Prices are stable.

While Asian economy is recovering as a whole, the recovery has become moderate in some Asian countries. The pace of economic growth in China is rising. In South Korea, the economy is expanding, but domestic demand shows some signs of slowing. In Thailand, the economy is expanding. In Malaysia, the economy is recovering. In Taiwan and Singapore, the economy is recovering at a moderate pace.

In Europe, (1) a pickup of the Euro Area economy is losing steam. The German economy is decelerating, and a pickup of the French economy is losing steam. (2) The U.K. economy continues movements of a recovery.

As for the international financial situation, U.S. stock prices, which had hit a five-year low in early October, rose in mid October as business settlement and earnings forecasts of some corporations were better than the market had expected. U.S. long-term interest rates and the dollar strengthened in mid October following a rise in stock prices, but then weakened reflecting concerns about the future course of the economy.

The target range of the U.S. Federal-Fund rate was lowered for the first time in 11 months by 0.50 percentage point to 1.25% at the Federal Open Market Committee meeting held on November 6.

As for the international commodity market, crude oil prices declined slightly amid movements to wait and see the future course of the rising tension with Iraq.