Monthly Economic Report (December 2003)

Assessment of the current state of the Japanese economy

  The economy is showing an incipient recovery.
  As for short-term prospects, the economy is expected to continuously show an upward movement as the U.S. and other economies recover. On the other hand, attention should be given to the developments of stock prices and exchange rates.

Policy stance

  The Government will pursue further strengthening of structural reform through early implementation of the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003." Furthermore, the Government made a cabinet decision on December 5 of the "Guidelines for Formulation of FY2004 Budget," which showed commitment to continue "budget for resolute reform."

  The Government started on December 1 the special public management of the Ashikaga Bank with an aim to prevent financial crisis. The Government also decided that every effort will be made to ensure stability of finance and economy of the region in which the bank operates. The Bank of Japan decided to supply necessary funds to the bank in order to maintain its operation.

  The Government, with the Bank of Japan, will continue to take powerful and comprehensive actions to secure stability of money and capital markets and to emerge from deflation.

Detailed explanations

1.Demand trends such as consumption and investment

While private consumption remains generally flat, firmness can be observed.
  While private consumption remains generally flat, firmness can be observed. Behind this are the facts that income has become roughly flat and that consumer confidence has been showing an incipient recovery. The Synthetic Consumption Index, which synthesizes demand-side statistics (Family Income and Expenditure Survey) and supply-side statistics (Indices of Industrial Producer's Shipment, etc.), rose in October from the previous month.
  Among individual economic indicators for October, the Family Income and Expenditure Survey shows that real consumption expenditure decreased from the previous month. Out of sales indicators, retail sales increased from the previous month thanks to brisk sales of autumn and winter clothing and passenger cars. Chain store sales posted a year-on-year gain for the first time in 16 months since June 2002. Department store sales rose from a year earlier. New car sales, which posted a year-on-year gain in October for the first time in seven months, fell sharply in November. Home appliance sales continued to increase thanks to brisk sales of DVDs and digital cameras. Domestic travel increased from a year earlier. Overseas travel continued to decrease from a year earlier, but the margin of decline narrowed.
  As for short-term prospects, private consumption is expected to continue the current trend for the immediate future. However, if the income environment of households improves, private consumption is expected to show movements toward an incipient recovery.

Business investment is increasing.
  Business investment is increasing thanks to an improvement of corporate profits and progress in capital stock adjustment. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side indicator of business investment, shows that business investment is on an increasing trend after turning up in the October-December quarter of 2002 from the previous quarter on a seasonally adjusted basis. Software investment remains generally flat.
  According to the Bank of Japan short-term business sentiment survey (tankan), business investment in fiscal 2003 in all industries of all sizes 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. As for leading indicators, machinery orders has been generally picking up, and construction work planned has remained roughly flat. Business investment is expected to remain on an increasing trend for the immediate future, as corporate profits are expected to continue their improvement.

Housing construction has remained roughly flat.
  Housing construction has remained roughly flat since the beginning of fiscal 2003, although it posted a temporary rise and decrease. In October, housing construction rose 6.8% from the previous month to an annual rate of 1,204 million units thanks to increase in construction of houses for rent and houses for sale, although construction of owned houses decreased. Total floor space generally followed the same movement. Housing starts are expected to move steadily if the employment and income environments improve and consumer sentiment on acquisition of houses picks up.

Public investment has been generally sluggish.
  Reflecting the budget situations of the state and local governments, public investment has been generally sluggish.
  In the national budget for fiscal 2003, the Government slashed public investment-related expenses by 3.7% from the previous fiscal year and prioritized budget allocations to areas that would contribute to the expansion of employment and private demand, focusing on four priority areas such as "attractive urban and rural communities rich in unique characteristics and inventiveness." Out of local public investment expenses under the fiscal plans of local governments for fiscal 2003, those for projects undertaken by local governments on their own funding have been slashed by 5.5% from the previous year and subjected to systematic curbs and priority-based allocations.
  Reflecting this situation, public works orders, the public works contract value, and orders received by 50 major companies in the July-September quarter of 2003 decreased from a year earlier, as they did in the previous quarter.
  Public investment in the October-December quarter is also expected to decrease from the same period of the previous year, as the public works contract value, etc. in October and November decreased from a year earlier and in view of the budget situations of the state and local governments.

Exports are increasing gradually. Imports have been flat. The surplus in the trade and services balance is flat.
  Exports are increasing gradually. By region, exports to Asia, mainly of electrical machinery & equipment to China, are on a moderate increasing trend. Exports to the U.S. as a whole have remained flat, although exports of transportation equipment have decreased recently. Exports to the EU, mainly of machinery equipment, have increased recently. As for the outlook for exports, close monitoring is required for the movement of exchange rates, although exports are expected to increase moderately in line with the steady recovery in the world economy.
  Imports as a whole have been flat, as imports of mineral fuels have decreased, although imports of machinery equipment, such as office equipment, are on an increasing trend. By region, imports from Asia as a whole have remained flat, although imports of mineral fuels and textile products have decreased. Imports from the U.S., mainly of machinery equipment, have decreased. Imports from the EU have been on a decreasing trend, although the monthly fluctuation has become bigger.
  Looking at the international balance of payments, the surplus in the trade and services account has been flat, as exports in volume are showing trend of an incipient recovery and imports have remained flat, although the deficit in the services account increased due to a rise in the number of Japanese tourists abroad.

2. Corporate activities and employment

Industrial production is showing an incipient recovery.
  Industrial production is showing an incipient recovery, mainly of information-related producer goods and capital goods, as export is showing signs of an incipient recovery and business investment has increased. Although inventory remains at a low level, corporations are cautious about inventory building. The inventory ratio has declined.
  As for the prospects of industrial production, the recovery is expected to continue through exports on the strength of the steady recovery in the world economy. In addition, the decline in the inventory ratio is expected to lead to an increase in production in the future. Incidentally, the Survey of Production Forecasts indicates industrial production is expected to increase in November and decrease in December.
  Tertiary industry activities remain flat.

Corporate profits have continued to improve. Firms' judgement on current business conditions shows improvement. The number of bankrupt companies is decreasing.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits in the July-September quarter of 2003 continued to increase from the level of the previous year, reflecting corporations' restructuring efforts including personnel cost reductions, and an increase in sales. Corporate profits on a seasonally adjusted basis also continued to post from the previous quarter. According to the Bank of Japan short-term business sentiment survey (tankan), corporate profits are expected to continue increasing in fiscal 2003. Among industries, the manufacturing industry is expected to post a double-digit year-on-year profit increase and the non-manufacturing industry is expected to post a profit increase. By size, big, medium and small corporations are all expected to see their profits increase.
  The BOJ tankan survey shows that business sentiment continued improving among manufacturers and showed an improvement among non-manufacturers. As for the future, enterprises as a whole expect a slight deterioration in their business conditions.
  The number of corporate failures has been falling as the number of applications for safety net guarantees has been increasing.

While the employment situation still remains severe with the unemployment rate remaining at a high level and the number of employees decreasing slightly, movements of an incipient recovery can be seen.
  The employment situation remains severe with the unemployment rate remaining at a high level due to labor demand factors, such as corporations' personnel expense reduction stance, and structural factors, such as a mismatch between job offers and seekers.
  The unemployment rate in October rose 0.1 point from the previous month to 5.2%. The number of persons not in the labor force increased and the number of unemployed workers increased slightly, as the number of employed persons decreased.
  The number of job offers has been on an increasing trend. The effective ratio of job offers to applicants has been rising moderately. On the other hand, the number of employees has been decreasing slightly of late. The proportion of business establishments that implemented employment adjustment, such as "overtime restrictions," in the July-September quarter decreased. The number of corporations saying they have excess employees has been on a downward trend.
  In October, contractual cash earnings decreased both from a year earlier and from the previous month. However, the underlying trend of wages has remained flat.

3. Prices and the financial market

Domestic corporate goods prices and Consumer prices are moving sideways.
  Domestic corporate goods prices are moving sideways. Breaking down the recent trend by type of goods, prices of iron & steel and nonferrous metals have been rising reflecting the firm commodity market and prices of agricultural, forestry & fishery products have been rising due to the effect of a poor rice crop caused by the cold summer, although prices of electrical machinery & equipment have continued a downward trend. Import prices (yen basis) have been declining moderately due to foreign exchange market developments.
  Corporate services prices have remained below the levels of the previous year.
  Consumer prices, which had been weakening since the autumn of 2000, have remained flat on a month-to-month basis supported by a rise in some sectors. Prices of general commodities have been declining at a slower pace than in the previous year due to a rise in prices of rice. On the other hand, general services prices remained generally flat, though corporations' low-price strategies have begun to show signs of changing, with eating out posting a year-on-year rise. Public utility charges rose from a year earlier.
  Although domestic corporate good prices and consumer prices are now leveling off, price-supporting factors may prove to be short-lived. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.

Stock prices have moved mostly above the 10,000-yen level (the Nikkei average). The yen has moved mostly flat against the U.S. dollar recently.
  Stock prices have moved mostly above the 10,000-yen level (the Nikkei average), after hitting the late-9,000-yen level in mid-November. The yen has been mostly moving at the 108-109 level against the U.S. dollar since October, although it temporarily appreciated to the 107 yen level. The euro has appreciated against both the yen and the U.S. dollar. It hit the highest level against the U.S. dollar since it was launched in Jan, 1999.
  Short-term interest rates are stable. Long-term interest rates moved sideways, standing at around 1.3%. Enterprises' financial conditions have improved, and the yield spread between corporate and government bonds has remained at a low level.
  The growth of the monetary base has remained high (at 14.1% if current deposits by Japan Post are excluded) against the background of ample fund provision from the BOJ. The growth rate of the M2+CD money supply has been slowing down recently.

4. Overseas economies

The world economy has been recovering steadily.

In the United States, the economy is recovering strongly
  In the third quarter, the U.S. economy grew at an annual rate of 8.2% from the previous quarter, the highest growth rate in 19 years. The strong performance is attributed to sharp increases in consumption and business investment. Labor productivity increase has been at the highest rate in 20 years and corporate profits have increased largely.
  With production increasing and corporations' willingness to hire improving, employment is picking up. As a result, consumer sentiment is improving and private consumption has remained generally on a rising trend.
  The U.S. economy is forecast to post a high growth rate of around 4%, as consumption and business investment are expected to continue increasing.
  The Federal Open Market Committee (FOMC) at its meeting held in early December reconfirmed its accommodative monetary policy to be maintained for a considerable period, although it judged that the probability of an unwelcome fall in inflation had diminished and appeared almost equal to that of a rise in inflation.

Asia has seen continued economic expansion in China and Thailand, and the other Asian economies show signs of recovery.
  In China, the economy has been expanding due to a steady increase in consumption and a rise in production caused by high growth of exports. Thailand is continuing economic expansion led by consumption and investment. In Malaysia, the economy is expanding moderately due to increases in consumption and exports. In Taiwan, the economy is recovering, with consumption increasing moderately and exports and production increasing. In Singapore, the economy has been picking up, with exports and production gathering momentum. In South Korea, the economy shows signs of picking up, with consumption turning up and exports and production increasing.

The Euro area economy is picking up, and the U.K.economy is recovering.
  In the euro area, the economy has picked up led by external demand, posting a positive growth for the first time in three quarters. In Germany, the economy has stopped contracting, as production shows signs of stabilizing thanks to a pick up in orders received and as business sentiment continues its improvement. The French economy has picked up, with external demand turning upward and both consumption and business investment increasing moderately.
  In the U.K., the economy is recovering, with consumption increasing and housing starts on an increasing trend.

International financial situations
  As for international financial situations, U.S. stock prices mostly remained on a rising trend backed by economic recovery. European stocks are also on a rising trend. Asian stocks are mostly leveling off. Long-term interest rates in major countries remain mostly flat since early November. The U.S. dollar has depreciated due to the expansion of U.S. trade deficits and other factors.
  Oil prices remained on a rising trend, reflecting market concerns about demand-supply tightening ahead of winter.