Monthly Economic Report(April 2003)
Assessment of the current state of the Japanese economy
While the economy has become broadly flat, uncertainty
still remains.
* Corporate profits are improving; and business investment
is showing an incipient recovery.
* While job offers are on an increasing trend, the employment situation continues to be severe with the unemployment rate staying at a high level.
* Private consumption remains generally flat.
* Export is increasing gradually; and industrial production has declined somewhat.
As for short-term prospects, the economy is expected to move towards an incipient recovery if the recovery in the U.S. and other economies is sustains. On the other hand, there are concerns that the uncertainty surrounding the development of the Iraq problem and the future of the U.S. economy may exert a downward pressure on final demand.
Policy stance
The Government will watch carefully the financial and economic situation both in Japan and abroad, and aim to realize sustainable economic growth led by private demand by implementing structural reform in the four main fields-finance, taxation, expenditure, and regulation- in a comprehensive and consistent manner. Following the approval by the Diet of the FY2003 budget and related legislation such as the tax reform bill, steady disbursement and implementation of these measures as well as the FY2002 supplementary budget will be carried out throughout the fiscal year without a break.
The Bank of Japan decided to raise the maximum amount of stocks it can purchase from commercial banks, and to examine the possible purchase of asset-backed securities. The Government, together with the Bank of Japan, will continue to take powerful and comprehensive actions to secure the stability of the capital market and to emerge from the deflation.
Detailed explanations
1.Demand trends such as consumption and investment
Private consumption remains generally flat.
Private consumption remains generally flat. Behind this are the facts that although the environment surrounding households still remains severe, such as continued weakness of income, consumer confidence, which has been declining since late last year, has decreased its rate of decline, though it remains at a low level.
As for movement on the demand side, although declining since last year, the rate of decline has been decreasing. The Synthetic Consumption Index posted a decrease from three months before for three consecutive months but increased from the previous month for two consecutive months. As for the movement of each expenditure item, the Family Income and Expenditure Survey shows that real consumption expenditure decreased from the previous month. The increasing trend of basic expenditure items has become moderate, as foods continued to decrease from the previous year, and selective expenditure items have continued to decrease.
Sales have begun to show signs of stopping decreasing. The margin of decrease in retail sales narrowed. Chain store sales continued to decrease from a year earlier. Department store sales were at the same level as a year earlier when sales were at a low level. New car sales continued to increase from a year earlier, as sales of compact cars remained brisk. Home appliance sales as a whole decreased from a year earlier, as sales of personal computers, a staple merchandise item, continued to decrease from a year earlier. Domestic travel continued to decrease from a year earlier. Overseas travel increased in reaction to the sharp decrease a year earlier, but the margin of increase was narrower.
As for short-term prospects, uncertainty remains partly because the effect of the Iraq situation on consumer confidence is uncertain.
Business investment has been picking up.
Business investment, which had been decreasing since the beginning of 2001, has picked up, as corporate earnings have been recovering. The 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, picked up in the October-December quarter of 2002. Shipment of capital goods,
which is a supply-side indicator of machinery equipment investment, has picked up slightly. Software investment has decreased slightly.
According to the Bank of Japan short-term business sentiment survey (tankan), business investment in fiscal 2003 in the manufacturing industry is expected to increase for the first time in three years and corporations' sense of excess capacity, which indicates future business investment, has continued its improvement. Machinery orders, which serve as a leading indicator of machinery equipment investment, have also continued to pick up. However, business investment is expected to remain moderate for some time to come as big redevelopment projects in the Tokyo metropolitan area are expected to complete the first stage and due to uncertainty about the future course of external demand and other final demand.
Housing investment is almost flat.
Housing construction in 2002 fell below 1.2 million units for the second consecutive year. Behind this lies the fact that 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. Housing construction increased to an annual rate of 1.195 million units in January but decreased to an annual rate of 1.154 million units in February. Total floor space followed the same movement. Housing investment was almost flat as a whole, as construction of houses for rent, which had kept decreasing, stopped decreasing, construction of owned houses decreased at a slower pace, and construction of houses for sale moved almost sideways.
However, factors that decrease housing construction are still observed. For example, consumer sentiment with regard to acquiring houses has been declining.
Public investment has been generally sluggish.
Reflecting the budget situations of the state and local governments, public investment has been generally sluggish.
In the supplementary national budget for FY2002, the Government took budgetary measures for public investment promoting structural reform. However, the size of the public investment after the supplementary budget was much smaller than that in the previous fiscal year, when special measures for "Reform-Promotion Public Investment" were implemented. Under the fiscal plans of local governments for FY2002, regarding 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.
Reflecting this situation, the contracted amount of public works, public works orders received, and orders received by 50 major companies all decreased from the April-June quarter to the October-December quarter, except for the orders received by 50 major companies posting an increase in the October-December quarter, although the supporting effects of the second supplementary budget for FY2001 that was carried over into the current fiscal year have been seen since the beginning of FY2002.
Public investment in the January-March quarter is likely to continue posting a year-on-year decrease in view of the decreases in the contracted amount of public works in January and February and the budgetary conditions of the state and local governments.
In the national budget for FY2003, the Government slashed public investment-related expenses by 3.7% from the previous fiscal year and prioritized budget allocations to areas that will lead to the expansion of employment and private demand, mainly to the four focused areas, including "building attractive urban areas and local areas with their own ideas and characteristics." Under the fiscal plans of local governments for FY2003, regarding investment expenses, those for projects to be undertaken by local governments on their own funding are to be slashed by 5.5% from the previous fiscal year through systematic restraint and focused allocation.
Exports are increasing gradually. Imports are increasing gradually. The surplus in the trade and services balance has been roughly flat.
Exports, which had lost the rising momentum seen up to the middle of last year as restocking, especially of IT-related equipment, since the beginning of the year came to a halt, increased gradually as a whole, as machinery equipment remained relatively firm. By region, exports to Asia as a whole increased moderately, as exports to China, especially of machinery equipment and chemicals, increased. Exports to the U.S. have been decreasing recently, as exports of automobiles decreased due to a halt in inventory replenishment and a decrease in sales volume. Exports to the EU increased moderately, although exports in February decreased in reaction to the rise in January caused by an increase in exports of ships. As for the outlook for exports, although the moderate expansion of Asian economies is expected to prop up exports, the potential for recovery in exports is weak, as the recovery of the U.S. economy has been weakening.
Imports remained on a moderate increasing trend on the strength of a continued increase in imports of mineral fuels, although imports from China, which had been contributing to an increase in imports, decreased in February, especially of textile products. By region, imports from Asia increased moderately as a whole, as imports from ASEAN countries remained flat and imports from China, especially of machinery equipment remained on an increasing trend, although imports from NIEs decreased. Imports from the U.S. have fluctuated wildly since the end of the harbor strikes on the West Coast, but on average, they remained generally flat. Imports from the EU remained almost flat.
Looking at the international balance of payments, the surplus in the trade and services account has been roughly flat, as both export and import volume increased gradually.
2. Corporate activities and employment
Industrial production has declined somewhat.
Industrial production has declined somewhat, as the increase in exports remained moderate amid the continuing weak movement of final demand. Although inventory is at a low level, corporations are cautious about inventory buildup due to uncertainty about the future course of external demand and other final demand, failing to lead to an increase in production.
As for the prospects of industrial production, although there will be no downward pressure on production from inventory, the potential for production recovery is expected to remain weak as domestic final demand, is expected to remain sluggish and any recovery led by exports is not seen as being so strong due to uncertainty about the future course of the U.S. economy. Incidentally, according to the Survey of Production Forecast, industrial production is expected to rise in March and rise slightly in April.
Tertiary industry activities, especially in the service industry, have declined moderately.
Corporate profits are improving. Firms' judgement on current business conditions continues improving, albeit moderately. The number of bankrupt companies remains almost flat.
According to the 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 electrical machinery, increased in the July-September quarter of 2002 due mainly to corporations' cost reduction including personnel expenses, through restructuring efforts, and corporate profits continued to increase in the October-December quarter, although sales continued to decrease. By type of industry, the manufacturing industry, especially electrical machinery and transportation machinery, increased profits significantly due to a rise in exports, while non-manufacturers as a whole saw their profits decrease slightly, as small and medium-sized enterprises suffered a sharp decrease in profits.
According to the Bank of Japan short-term business sentiment survey (tankan), industries, especially manufacturers, expect their profits to increase sharply from the second half of FY2002 to the FY2003.
The BOJ tankan survey says the business sentiment of automobile and other big manufacturing industries stopped improving, although business sentiment, especially of small and medium-sized manufacturers, has been improving, albeit moderately. As for future prospects, enterprises have been cautious, forecasting a slight deterioration of their business.
The number of corporate failures remained almost flat, chiefly because the number of applications for safety net guarantees is increasing.
The employment situation still remains severe. While job offers are on an increasing trend, the employment situation continues to be severe with the unemployment rate remaining at a high level and wages continuing to weaken.
The employment situation remains severe with the unemployment rate remaining at a high level due to manpower requirement factors, such as corporations' personnel expense reduction stance, and structural factors, such as mismatch of employment.
The unemployment rate dropped 0.3% in February from the preceding month to 5.2%. By gender, the unemployment rate for women dropped sharply. The number of unemployed women decreased, while the number of women not in the labor force increased. The number of employees remains flat.
The number of new job offers has been on an increasing trend since the first half of 2002. The effective job offer ratio continued to increase moderately. Overtime hours worked in the manufacturing industries has been on a moderate increasing trend. The number of corporations saying they have excess employees decreased slightly but still remains at a high level.
Wages remained weak, reflecting corporations' personnel expense reduction stance, although contractual cash earnings posted both year-to-year and month-to-month increases.
3. Prices and the financial market
Domestic Corporate Goods Prices and Consumer Pricesare moving sideways due to the effect of an old rise in crude oil prices.
Import prices (yen basis), for which the upward trend had been weakening since late 2002, have been rising recently. Domestic Corporate Goods Prices have been moving sideways. Recently, the prices of petroleum & coal products and chemicals have been rising due to a rise in import prices and the price of iron & steel has been rising reflecting an end in inventory adjustments, although the prices of electrical machinery have been declining.
The Corporate Service Price Index has continued to decline from a year earlier.
Consumer prices, which had been declining slightly since the fall of 2000, remained flat from the previous month due to the effect of a rise in crude oil prices caused by the situation surrounding Iraq. In general commodities, the prices of other industrial products declined at a slower pace due to a rise in the prices of petroleum products caused by a rise in crude oil prices, although the prices of durable goods and textiles declined. Although the prices of public services & electricity, gas & water charges declined, general services moved sideways.
The effect of a rise in crude oil prices may prove to be temporary. 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 and the yen have been recently moving, reflecting mainly the market view of the development of the Iraq situation. Long-term interest rates remain on a downward trend.
Stock prices and the yen have been recently moving, reflecting mainly the market view of the development of the Iraq situation. The Nikkei Stock Average ended FY2002 at 7,972, down about 28% for the year, while the yen ended FY2002 at 120.15 to the dollar, a rise of about 10% against the dollar for the year.
Short-term interest rates are stable, while long-term interest rates are on a downward trend supported by strong investors' demand, etc. Enterprises' financial conditions have remained almost flat and the yield spread between private bonds and government bonds has narrowed recently.
The growth of the monetary base (monthly average balance) has remained at a high level against the background of ample fund supplies from the BOJ, but the growth rate has slackened. The growth rate of M2+CDs (monthly average balance) has remained at around the 2% level.
4. Overseas economies
The Asian economy is expanding moderately. While the U.S. economy continues to recover, the strength of the recovery is weakening.
While the U.S. economy continues to recover, the strength of the recovery is weakening.
The momentum of the pick-up of private consumption is weakening. Behind this lies the deterioration of consumer sentiment and the increasing severity of the employment situation. A sharp rise in gasoline prices also contributed to the weakening of private consumption. Weekly retail sales decreased following the start of military actions against Iraq.
In addition to the worsening of business confidence, orders for capital goods, which serve as a leading indicator for business investment, are decreasing.
There are concerns about the effect of the deterioration of consumer and business confidence on the economy.
In connection with the war in Iraq, Bush administration submitted to Congress a supplementary budget totaling 75 billion dollars, mainly to cover the war expenses.
The Asian economy is expanding moderately.
In China, the economy is expanding due to solid expansion of domestic demand. In South Korea, the economy is expanding, but business investment is weak, as growth of new machinery orders slows. In Thailand, the economy continues to expand. In Taiwan and Malaysia, the economy is expanding moderately.
However, there are some concerns for the future, such as slackening exports mainly to the United States and the effects of severe acute respiratory syndrome (SARS) especially on Hong Kong.
The Euro Area and U.K. economies are decelerating.
In the Euro Area, both consumer and business confidence is eroding, reflecting an increase in unemployment rates and higher crude oil prices. In Germany, the economy continues to weaken, as consumption and investment have weakened. In France, the economy is decelerating as consumption has leveled off. Euro Area exports have slackened due to the effect of the appreciation of the Euro since last autumn and the weakening recovery of the U.S. economy.
In the U.K., the economy is decelerating. This is mainly because the consumption that was one of the main engines of economic recovery has stalled, reflecting a sharp fall of consumer confidence since early this year against the background of military actions against Iraq.
International financial situations
The U.S. and its coalition forces launched military actions against Iraq on March 20. Crude oil prices leveled off after falling in mid-March on expectations that the military conflict would come to an end in a short period of time. U.S. stock prices rose in mid-March on the same expectations, then moved stably. Long-term interest rates and the dollar rose slightly in mid-March, then moved stably.