Monthly Economic Report(July 2003)
Assessment of the current state of the Japanese economy
While the economy remains roughly flat, weak movements are seen recently
in some areas.
As for short-term prospects, the economy is expected to move towards an
incipient recovery if the recovery in the US and other economies is sustained.
On the other hand, attention should be given to the uncertainties surrounding
the future of the overseas economy, and to the developments of stock prices
and long-term interest rates.
Export has become flat; and industrial production is declining somewhat.
Corporate profits continue to show a moderate improvement; and business
investment continues to show a moderate incipient recovery.
Private consumption remains generally flat. Employment situation continues
to be severe.
Stock prices are showing a significant recovery.
The Government, in order to realize sustainable economic growth, made
a cabinet decision on the Basic Policies for Economic and Fiscal Policy
Management and Structural Reform 2003,"on June 27, which aims to vitalize
the economy, to assure the people of their security, and to establish public
finance accounting for future generations. Further strengthening of structural
reform will be pursued through early implementation of the Basic Policies.
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.
1.Demand trends such as consumption and investment
Private consumption remains generally flat.
Private consumption remains generally flat. Behind this are the facts
that income becomes roughly flat and that consumer confidence has decreased
its rate of decline, though it remains at a low level. 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.), posted a small gain in May from the previous month.
Among individual economic indicators, 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, as sales of automobiles posted an increase. Chain store sales remained
below the level of the previous year. Department store sales remained at
a low level due to bad weather, such as typhoons, though the margin of
decline narrowed from the previous month. New car sales in the April-June
quarter decreased on the average from the previous quarter in reaction
to last-minute purchases in connection with a reform of the greening of
the automobile tax system. Home appliance sales remained below the previous
year's level as sales of personal computers, a staple merchandise item,
continued to decrease substantially from a year earlier. Domestic travel
continued to decrease from a year earlier. Overseas travel decreased sharply
in May from a year earlier as the Severe Acute Respiratory Syndrome (SARS)
outbreak discouraged people from going abroad. Incidentally, the WHO announced
on July 5 that it had removed Taiwan, the last hotspot, from its list of
Private consumption is expected to continue the current trend for the
immediate future. Given the still severe employment situation, a continued
close watch will be required on private consumption.
Business investment has continued to be picking up moderately.
Business investment has continued to be picking up moderately due 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 a moderate recovery trend, although it fell back slightly
in the January-March quarter of 2003 after turning up in the October-December
quarter of 2002 from the previous quarter on a seasonally adjusted basis.
However shipments of capital goods, a supply-side indicator of machinery
equipment investment, weakened slightly until May. Software investment
remained roughly flat.
As for leading indicators and annual plans, 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, a leading indicator of machinery equipment investment,
has been picking up, and building construction starts (floor area), a leading
indicator of construction investment, has remained roughly flat. Business
investment as a whole is expected to stay moderate for the immediate future.
However, business investment is likely to resume recovery, if uncertainty
is wiped out about the future course of final demand including overseas
Housing construction is almost flat.
Housing construction in fiscal 2002 remained below 1.2 million units
for two years on end, as consumer sentiment on acquisition of houses has
been declining due to the harsh employment and income environments and
the long-term downward trend of real estate prices that has made replacement
difficult. Housing construction declined consecutively in February and
March before rising to an annual rate of 1.16 million units in April and
1.166 million units in May. Total floor space followed the same movement
until April, but decreased in May. The decrease can be attributed to the
fact that while construction of houses for rent increased, construction
of houses for sale that are larger in floor space than houses for rent
However, consumer sentiment on acquisition of houses has been declining.
This is expected to become a factor to depress housing starts.
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 fiscal 2002, the Government
took budgetary measures for public investment promoting structural reform.
However, the size of fiscal 2002 public investment after the supplementary
budget was much smaller than in the previous year, when special measures
for "Reform-Promoting Public Investment" were implemented. Out of local
public investment expenses under the fiscal plans of local governments
for fiscal 2002, those for projects undertaken by local governments on
their own funding were slashed by 10.0% from the previous fiscal year.
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, the public works contract value and public
works orders posted year-on-year decreases from the April-June quarter
of 2002 to the January-March quarter of 2003, although the second supplementary
budget for fiscal 2001 that was carried over into fiscal 2002 worked to
support public investment.
Public investment in the April-June quarter is likely to remain below
the level of the previous year, given the state and local budget conditions.
In April and May, the contracted value of public construction, etc. dropped
from a year earlier.
Exports and Imports have become flat. The surplus in the
trade and services balance is increasing slightly.
Exports have become flat. By region, exports to Asia have recently
been declining. Exports to the U.S. as a whole have remained flat, although
they have increased recently due to a rise in exports of automobiles. Exports
to the EU have recently been declining as a rise in automobile exports
accompanying the introduction of new models since the beginning of the
year has come to a halt. The outlook for exports is likely to remain flat
if the current situation of the world economy remains unchanged. However,
exports will move towards an incipient recovery if the recovery in the
U.S. economy is sustained.
Imports as a whole have become flat as domestic production has declined
somewhat. By region, imports from Asia have increased moderately as a whole,
as imports from China increased, although imports from NIEs and ASEAN have
become flat. Imports from the U.S. have been on a decreasing trend, although
monthly fluctuation has become bigger. Imports from the EU, especially
of machinery equipment, decreased.
Looking at the international balance of payments, the surplus in the
trade and services account has been increasing slightly due to flat exports
and imports in volume, a fall in oil prices and a reduction of the deficit
in the services account due to a decrease in Japanese tourists abroad.
2. Corporate activities and employment
Industrial production has declined somewhat.
Industrial production has declined somewhat, as export has become flat
amid the continuing weak movement of final demand. Although inventory is
at a low level, corporations are cautious about inventory building 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, the potential for production
recovery is expected to remain weak, as domestic final demand is likely
to stay sluggish and exports are expected to have no strong power to trigger
production recovery due to uncertainty about the future course of the U.S.
economy, although inventories are expected to have little downward pressure
on production. Incidentally, the Survey of Production Forecasts indicates
industrial production is expected to increase in June and decrease in July.
Tertiary industry activities remain flat.
Corporate profits have continued to improve moderately. Firms'
judgement on current business conditions continues improving, albeit
moderately. The number of bankrupt companies is decreasing moderately.
According to the Quarterly Financial Statements Statistics of Corporations
by Industry, corporate profits in the January-March quarter of 2003 continued
to increase from the level of the previous year, reflecting corporations'
restructuring efforts including personnel cost reductions. But the year-on-year
increase slowed in the quarter as profits turned down from the previous
quarter on a seasonally adjusted basis. According to the Bank of Japan
short-term business sentiment survey (tankan), corporate profits posted
a double-digit year-on-year increase in the second half of fiscal 2002
and are expected to continue increasing in fiscal 2003. Among industries,
the manufacturing industry, including electrical machinery and steel manufacturers,
posted a year-on-year profit increase of 50% in the second half of fiscal
2002 and is expected to post a double-digit rise in fiscal 2003. On the
other hand, the non-manufacturing industry is expected to post a profit
decline in the first half of fiscal 2003 but a double-digit year-on-year
profit increase in the second half. By size, big, medium and small corporations
are all expected to see their profits increase in fiscal 2003 as they did
in fiscal 2002.
The BOJ tankan survey shows that business sentiment continued improving,
albeit moderately, among manufacturers. But non-manufacturers stopped seeing
business sentiment improvement. As for the future, enterprises as a whole
expect a slight improvement in their business conditions.
The number of corporate failures has been falling slowly as the number
of applications for safety net guarantees has been increasing.
The employment situation still remains severe with the unemployment
rate remaining at a high level.
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 May remained at 5.4%, the same level as in
April. The number of employees remained flat as a whole.
The number of job offers, which had been on an increasing trend since
the first half of 2002, has remained roughly flat. The effective ratio
of job offers to applicants has also leveled off. Overtime hours worked
in the manufacturing industry have stayed flat. The number of corporations
saying they have excess employees increased slightly.
The underlying trend of wages has become flat, although fix wages in
May increased both from a year earlier and from the previous month.
3. Prices and the financial market
Domestic corporate goods prices are declining slightly.
prices are moving sideways.
Domestic corporate goods prices are declining slightly. Breaking down
the recent trend by type of goods, iron & steel and some other prices
have been rising. Processed foodstuffs prices have also soared since a
liquor tax on low-malt beer was hiked in May. On the other hand, electrical
machinery & equipment prices have continued a downward trend. Prices
of petroleum & coal products and chemicals have also declined in line
with the commodity market weakness. Import prices (yen basis) fell in May
due to an oil price fall and foreign exchange market developments.
Corporate services prices have remained below the levels of the previous
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 as a whole declined at almost the
same pace as in the previous year, as prices of petroleum products fell
in May. On the other hand, general services prices remained flat, though
personal services prices dropped. Corporations' low-price strategies have
begun to show signs of changing, with some restaurants believed to have
raised prices in July. Public utility charges rose from a year earlier
due partly to a hike of the cigarette tax in July.
Although 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 remained on an upward trend and long-term interest
rates have been rising.
As for the stock market, the key Nikkei average has been on an upward
trend backed by a U.S. market rally and an improvement in corporations'
business sentiment, hitting the year' highs. The U.S. dollar has been
moving at the \117-119 level since June.
Short-term interest rates are stable. Long-term interest rates, which
had been on a downward trend, turned higher and rose above 1.0% on a market
perception that the global downtrend in interest rate has run its course.
Enterprises' financial conditions have improved, and the yield spread between
corporate and government bonds has narrowed recently.
The growth of the monetary base has remained high (at
16.3% 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 since late last year.
4. Overseas economies
While some Asian economies continue to expand, the global economy has
continued its weak recovery.
The U.S. economy has continued its weak recovery.
Consumer sentiment has been improving moderately. Backed by this, private
consumption is increasing moderately. Downward trend in production is coming
to an end, as IT-related sectors are leading a pick up.
However, business investment decreased in the first quarter and capital
goods orders decreased. Employment decreased and the unemployment rate
climbed up to the highest level since 1994. The weakness of the corporate
sector is the background of weak recovery.
With the inflation rate remaining on a downward trend, the Federal
Open Market Committee (FOMC) decided on June 25 to lower the federal funds
rate target by a quarter percentage point for the first time since last
It is highly likely that US growth rate is going to rise in the second
half of this year, as business investment is expected to pick up backed
by an improvement in corporate profits and as a tax-cut package is expected
to stimulate consumption and investment. On the other hand, concerns remain
about slow recovery of investment and employment.
Against this expectation for recovery, business sentiment continues
its improvement. Stock prices, especially of IT-related stocks, have been
on an upward trend since June. Long-term interest rates, which had continued
to decline until early June on expectation of a fall in the inflation rate,
turned higher partly because of the prospects for economic recovery.
Asia has seen continued economic expansion in China and Thailand,
and deceleration in South Korea and Taiwan.
In China, the economy is expanding due to steady growth in investment
and exports but the growth of consumption and production has slackened
recently due to SARS scares. Thailand is continuing economic expansion
led by consumption and investment. Malaysia is seeing moderate economic
expansion due to slower growth of consumption and exports. In Taiwan, the
economy is decelerating due to sluggish investment and slower growth in
consumption and production caused by SARS scares. In South Korea, the economy
is decelerating due to slower growth in consumption and investment as well
as sluggish production. In Singapore the economy is decelerating due to
sluggish consumption and production. Meanwhile, the exports from Asian
countries and regions to the U.S. are picking up.
With no new infected patients reported, the SARS epidemic appears to
have come to an end.
The Euro area economy is weakened and the U.K. economy
In the euro area, exports are on a downward trend due to the appreciation
of the euro since last autumn. With production remaining flat amid deteriorating
business sentiment, the euro area economy is weakened. On the other hand,
stock prices rose following an interest rate cut by the European Central
Bank in early June. In Germany, there are concerns about an economic recession,
as the inflation rate stays at a low level amid continuing decline in production
and consumption. The French economy is flat as domestic demand has increased
In the U.K., the economy is decelerating, as domestic demand, mainly
housing investment, slowed.
International financial situations
As for international financial situations, prices of major Asian and
European stocks are on an upward trend against the background of a continuing
rise in U.S. stock prices. Long-term interest rates have been rising worldwide
since late June partly because of the prospects for economic recovery.
Oil prices, which rose in early June, continued a downward trend after
OPEC at a general meeting decided to keep the ceiling on oil output unchanged.