Monthly Economic Report(June 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 U.S. and other economies is sustained. On the other hand, there are concerns that the uncertainties surrounding the future of the U.S., Asian, and other economies may exert a downward pressure on final demand.

Policy stance

The Government aims to realize sustainable economic growth by promoting structural reform. To this end, the Government intends to decide the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003 (provisional title)" during the month of June in order to vitalize the economy, to assure the people of their security, and to establish sustainable public finance.
The Bank of Japan decided, on June 11, the outline of the scheme for outright purchases of asset-backed securities (ABSs). 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

Private consumption remains generally flat.

Private consumption remains generally flat, although the environment surrounding households still remains severe, such as continued weakness of income. Behind this is the fact that consumer confidence has decreased its rate of decline, though it remains at a low level. The Synthetic Consumption Index, which synthesizes a demand-side statistics (Family Income and Expenditure Survey) and supply-side statistics (Indices of Industrial Producer's Shipment, etc.), posted a small fall in April from the previous month due mainly to a drop in new car sales.
Among individual economic indicators, the Family Income and Expenditure Survey shows that real consumption expenditure increased from the previous month. Out of sales indicators, retail sales posted a month-to-month decline for the second consecutive month. Chain store sales remained below the level of the previous year. Department store sales accelerated their decline due to low temperatures and bad-weather weekends. New car sales decreased sharply in April from a year earlier in reaction to last-minute purchases in connection with a reform of the greening of the automobile tax system. In May, they decelerated a fall in the absence of such factor. 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. The decline in overseas travel accelerated sharply as the Severe Acute Respiratory Syndrome (SARS) outbreak discouraged people from going abroad.
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 recovery has become moderate.

Business investment, which had been recovering due to progress in capital stock adjustment and a rise in overseas demand, has seen its recovery become moderate as overseas demand leveled off. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side indicator of business investment, shows that business investment turned up in the October-December quarter of 2002 from the previous quarter on a seasonally adjusted basis and fell back slightly in the January-March quarter of 2003. Shipments of capital goods, which is a supply-side indicator of machinery equipment investment, weakened slightly until April. 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. However, the recovery of machinery orders, which is a leading indicator of machinery equipment investment, has become moderate, and building construction started (floor area), a leading indicator of construction investment, have remained roughly flat. Business investment as a whole is expected to stay moderate for the immediate future. If uncertainty is wiped out about the future course of final demand including overseas demand, however, business investment is likely to resume recovery.

Housing construction  is almost flat.

Housing construction in fiscal 2002 decreased 2.4% from the preceding year to 1.146 million units, remaining below 1.2 million units for two years on end, as construction of owner-occupied houses and houses for sale decreased despite a rise in rental houses. The factor behind the decrease in housing construction is that 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. Total floor space followed the same movement. Housing investment has remained almost flat as a whole, as construction starts have declined for owner-occupied houses, moved almost sideways for houses for sale and turned up for rental houses.
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.
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, and orders received by 50 major companies posted a year-on-year decline during the period except for the October-December quarter of 2002 when they posted an increase, although the second supplementary budget for fiscal 2001 that was carried over into fiscal 2002 worked to support public investment.
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.
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 is increasing slightly.

Exports as a whole have become flat, as those to Asia have recently been declining. By region, exports to Asia as a whole have recently been declining, although exports to China remain firm. Exports to the U.S. have become flat as automobile exports have followed a trend of domestic sales. 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 or weaken because of the severe export environment including a weak U.S. economic recovery and the effects of the SARS on Asian economies.
Imports as a whole have become flat as domestic production has weakened and imports from China have leveled off. By region, imports from Asia have become flat as a whole, as imports from ASEAN countries and China have become flat, although imports from NIEs decreased. Imports from the U.S. have been weakening as a whole, although those in April increased especially of machinery equipment such as aircraft. 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 May and June.
Tertiary industry activities have been weakening.

Corporate profits have continued to improve, although the pace has become moderate. Firms' sentiment on current business conditions continues improving, albeit moderately. The number of corporate bankruptcies has been decreasing slowly.

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 were expected to post a sharp, double-digit year-on-year increase in the second half of fiscal 2002 and in fiscal 2003. Among industries, the manufacturing industry, including electrical machinery and steel manufacturers, was expected to post a year-on-year profit increase of 40% in the second half of fiscal 2002 and a double-digit rise in fiscal 2003. On the other hand, the non-manufacturing industry was expected to post a slight profit increase in the second half of fiscal 2002 and a double-digit rise in fiscal 2003. By size, big, medium and small corporations were all expected to see their profits increase in fiscal 2003. According to the Nihon Keizai Shimbun, exchange-listed companies (closing annual books in March) boosted fiscal 2002 recurring profits by a sharp 70% from the previous year and are expected to post a double-digit profit rise in fiscal 2003.
The BOJ tankan survey shows that business sentiment continued improving, though slowly, mainly at small and medium manufacturers. But automakers and other large manufacturers stopped seeing business sentiment improvement. As for the future, enterprises expect a slight deterioration in their business conditions, maintaining a cautious view.
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 staying at a high level.

The employment situation remains severe with the unemployment rate kept 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 April remained at 5.4%, the same level as in March. The jobless rate fell for men and rose for women. 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 portion of business establishments implementing employment adjustments, including overtime work restrictions, declined slightly in the January-March quarter of 2003.
Wages have remained weak. In April, fixed wages fell both from a year earlier and from the previous month, with total cash earnings decreasing from the previous year.

3. Prices and the financial market

Domestic corporate goods prices are declining slightly. Consumer 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 was hiked on beer containing less than 66.7% by weight of malt in May. On the other hand, electrical machinery & equipment prices have continued a downward trend. Prices have also declined petroleum & coal products, and chemicals 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 year.
Consumer prices, which had been weakening since the autumn of 2000, have remained flat on a month-to-month basis due to the effect of an earlier oil price rise. Among general commodities, durable goods have been falling in prices. On a rise in prices for petroleum products after the oil price hike, prices of "other industrial products" have increased. On the other hand, general services prices turned down in April due to a drop in personal services prices. Corporations' low-price strategies have begun to show signs of changing. Public utility charges have soared due to a hike in the ratio of copayment under the health insurance scheme in April.
Although consumer prices are now leveling off, a recent decline in oil prices is expected to diffuse its effect in the future. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.

Stock prices have recently been on an upward trend and long-term interest rates have been declining.

As for the stock market, the key Nikkei average had moved around 8,000 in the early and middle parts of May, and has recently been rising on a U.S. market rally. The U.S. dollar fell below \116 in mid-May and rose against the yen toward late May.
Short-term interest rates are stable, while long-term interest rates are on a downward trend due to investors' strong demand for bonds. Enterprises' financial conditions have remained almost unchanged, and the yield spread between corporate and government bonds has narrowed recently.
The growth of the monetary base has remained high above 10% (at 11.9% if current deposits by Japan Posts 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 strength of the globaleconomic recovery is weakening.

The U.S. economy has continued weak recovery.

Consumer and business sentiment has been improving. Backed by this, private consumption is picking up and stock prices are rallying, indicating bright prospect.
However, production continued to decrease and the capacity utilization rate has fallen further. Business investment decreased again and capital goods orders decreased. Employment decreased. That corporate sector weakness is dragging down the overall strength of recovery.
The inflation rate is down to low level. The core consumer price index, excluding foods and energy, has posted the smallest rise since 1966.
In late May, a $350 billion (in 11 years) tax-cut package was legislated, which includes the provision for the reductions in dividend and capital gains tax rates and the acceleration of the tax-cut schedule decided in 2001.

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 strong investment and exports. Thailand is continuing economic expansion due to solid growth in domestic and external demand. Malaysia is seeing moderate economic expansion due to slower export growth. In South Korea and Taiwan, the economy is decelerating with sluggish consumption and investment. Singapore continues economic deceleration as production and exports are slack.
The SARS outbreak has affected consumption in China and Taiwan, and tourism in ASEAN countries. In many Asian countries and regions, export to the U.S. show a pick up.

The Euro area economy is weakened and the U.K. economy is decelerating.
In the euro area, exports are on a downward trend due to the appreciation of euro since last autumn. The appreciation of euro, gained its momentum these days and hit an all-time high in late May. As business confidence continues to deteriorate, the euro area is weakened with growth rates slowing. Germany in particular is heading for a recession, with negative economic growth for two consecutive quarters and the inflation rate continues to subside. The French economy is flat as domestic demand has increased moderately. In response to these economic conditions, the European Central Bank decided to cut its policy interest rate (the minimum bid rate on the main refinancing operations) by half a point to 2.0% on June 5.
In the U.K., the economy is decelerating under a continued overseas demand slump coupled with a slowdown in domestic demand growth.

International financial situations

As for international financial situations, U.S. stock prices rose in May and June on expectations of economic recovery. U.S. long-term interest rates have followed a downward trend since the Federal Open Market Committee revealed its recognition of the risk of a substantial fall in inflation in early May. The dollar has continued sharp depreciation mainly against the euro.
Oil prices continued an upward trend from early May on speculations about a possible production cut at a general meeting of the Organization of Petroleum Exporting Countries.