Assessment of the current state of the Japanese economy
While the economy has become roughly flat, uncertainty is increasing due to the situation surrounding Iraq.
Corporate profits are improving; and business investment is showing an incipient recovery.
While job offers are on an increasing trend, employment situation continues to be severe with unemployment rate staying at a high level.
While private consumption remains generally flat, weak movements can be seen most recently.
Export has become flat; 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 U.S. and other economies sustains. On the other hand, there are increasing concerns that the increasing uncertainty and the sluggishness of world stock prices coming from the situation surrounding Iraq may exert a downward pressure on final demand.
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. While steadily implementing the FY2002 supplementary budget, the Government will also make efforts in order to seek an early approval by the Diet of the FY2003 budget and related legislation such as the tax reform bill. In order to secure a proper functioning of the stock market, necessary measures such as the strict monitoring of the market have been taken.
The Government, with the Bank of Japan, will make every
effort so that a financial crisis would never occur, and also continue
to take powerful and comprehensive actions to secure stability of finance
and capital markets and to emerge from deflation.
1.Demand trends such as consumption and investment
Private consumption has been generally flat, but weak movements can be seen most recently.
Private consumption has been generally flat since the beginning of 2002, but weak movements can be seen most recently. Behind this are the facts that the environment surrounding households has become severe, such as continued weakness of income, and that consumer confidence has weakened recently.
As for movement on the demand side, although there had been robust movement since last year, weak movements have been seen recently. The Synthetic Consumption Index posted a decrease from three months before for two consecutive months. As for the movement of each expenditure item, the Family Income and Expenditure Survey shows that real consumption expenditure increased from the previous month, but this is largely due to reaction to the sharp decrease in December. The increasing trend of basic expenditure items has become moderate, as foods continued to decrease from the previous year, and selective expenditure items have begun to decrease at a faster pace.
Sales are weakening on the whole. Retail sales still have
a weak tone. Chain store sales continued to decrease from a year earlier.
The margin of decrease in Department store sales narrowed due partly to
the effect of earlier implementation of new-year sales campaigns and partly
to reaction to the sharp decrease in the previous month. 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.
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. 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.
The potential for recovery in business investment is expected to be weak. Because the forecast of machinery orders for January-March quarter of 2003 is cautious, although it has been picking up since bottoming out in the first half of FY 2002 (machinery orders is a leading indicator of machinery equipment investment). Even though it has picked up, business investment is expected to remain moderate as corporations still have a sense of excess capacity according to the Bank of Japan short-term business sentiment survey (tankan) and as the pick-up in corporations' production activity is expected to remain weak due to uncertainty about the future course of external demand and other final demands.
Housing investment is decreasing moderately.
Housing construction in 2002 fell below 1.2 million units for the second consecutive year. Housing construction has been decreasing moderately due to a decrease in the construction of condominiums since the April-June quarter of 2002. 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.
In January 2003, housing construction came to an annual rate of 1.195 million units due to increases in the construction of owned houses, houses for rent, and houses for sale. 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 a supplementary national budget for FY2002, the Government took budgetary measures for public investment promoting structural reform and for disaster contingency planning, including about 2.0 trillion yen on a national expense basis (about 3.4 trillion yen on a project basis). 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 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.
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 the budgetary conditions
of the state and local governments.
Exports have become flat. Imports are increasing slightly. The surplus in the trade and services balance has decreased slightly.
Exports, which had lost the rising momentum seen up to the widdle of last year as restocking, especially of IT-related equipment, since the beginning of the year came to a halt, moved sideways as a whole, as machinery equipment, such as transport 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. However, it should be noted that the increase in January may have been higher than the actual situation, as there were early exports ahead of the lunar new year in the beginning of February. Exports to the U.S. have been weakening slightly recently, as exports of automobiles decreased due to a halt in inventory replenishment and a decrease in sales volume. Exports to the EU remained generally flat, as exports of automobiles increased due to the launch of new models. 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 reflecting the tightening situation over Iraq.
Imports increased moderately on the strength of a continued increase in imports of mineral fuels and a rising trend in imports from China, although production is weakening slightly. By region, imports from Asia increased as a whole, as imports from China, especially of machinery equipment and textile products, increased, although imports from NIEs and ASEAN countries decreased. Imports from the U.S. posted a sharp increase recently due to the end of 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 decreased slightly, as export
volume moved sideways while import increased moderately.
2. Corporate activities and employment
Industrial production has declined somewhat.
Industrial production, which had picked up last year reflecting an increase in exports as well as progress and an end in inventory adjustment, has declined somewhat since late last year, as exports leveled off 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 demands, 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. and other economies. Incidentally, according to the Survey of Production Forecast, industrial production is expected to fall slightly in February and rise slightly in March.
Tertiary industry activities, especially in the Wholesale Trade, Retail Trade, Eating and Drinking Places have declined moderately.
Corporate profits are improving. Firms' judgement on current business conditions continues improving, albeit moderately. The number of bankrupt companies is decreasing.
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 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 in the second half of FY2002.
The BOJ tankan survey says business sentiment of enterprises, especially of manufacturing industries, has been improving, albeit moderately, although business sentiment of small and medium-sized enterprises has remained severe and at low levels. As for future prospects, enterprises have become cautious, forecasting a slight deterioration of their business.
The number of corporate failures decreased, chiefly because the number of applications for safety net guarantee 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 in January rose 0.2% from the preceding month to 5.5%, the highest-ever level seen in August and October of last year. The number of employees is decreasing, with decreasing from the previous month for the first time in three months.
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 work hours in the manufacturing industries have been on a moderate increasing trend, although they increased sharply in January.
Wages remained weak, with total cash wages decreasing from the previous year, although contractual cash earnings posted both year-to-year and month-to-month increase.
3. Prices and the financial market
Domestic Corporate Goods Prices are moving sideways and Consumer Prices are declining slightly.
Import prices (yen basis), for which 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 have been declining slightly since the fall of 2000. General commodities declined as a whole as the prices of Durable goods and Textiles declined, although the prices of Other industrial products declined at a slower pace due to a recent rise in the prices of Petroleum products. Although General services moved sideways, the prices of Public services & electricity, gas & water charges declined.
Close monitoring is required for the movement of crude oil prices, as the effect of a rise in crude oil prices are seen in both Domestic Corporate Goods Prices (Petroleum & coal products, and Chemicals) and Consumer Prices (Petroleum products).
Taken together, these movements show that the Japanese
economy is in a mild deflationary phase in that the decline of prices is
Financial market: Stock prices declined due to uncertainty over international political situations, etc. Short-term money market is stable ahead of end-March book closing.
Reflecting uncertainty over international political situations, etc. the stock market has been weak and the yen is on the appreciating trend against the dollar since mid-February.
Money market has been stable ahead of end-March book closing. Short-term interest rates remained almost unchanged, moving in the 0.001 - 0.002% range. Long-term interest rates remained at the 0.7% level 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 has weakened. Crude oil prices are rising, reflecting the tightening situation over Iraq.
While the U.S. economy continues to recover, the strength of the recovery has weakened.
Momentum of picking up of private consumption is weakening due to the deterioration of consumer confidence. Behind this deterioration are tension over Iraq and increasing severity of employment situation. The heaviest snowfall in seven years in the East Coast and a sharp rise in the prices of gasoline also contributed to the weakening of private consumption. Although core prices are on a stable trend, some prices rose recently due to a rise in crude oil prices.
Business investment, especially in machinery equipment, has been picking up and orders for capital goods, which is a leading indicator for investment, are increasing.
There are concerns that the tension over Iraq is sharply
deteriorating consumer and business confidence.
The Asian economy is expanding moderately.
In China, the economy is expanding, due to solid expansion of the domestic demand and continuing increase of the exports. In South Korea, the economy is expanding. But the new business investment is weak, as growth of the new machinery orders shows. In Thailand, the economy continues to expand. In Taiwan and Malaysia, the economy is expanding moderately, supported by increases in domestic demand.
However, in many Asian countries and regions, exports,
mainly to the United States, have slackened and a higher crude oil prices
is raising the rate of consumer price increases.
The Euro Area economy is decelerating.
In Germany, the economy continues to weaken, as consumption and investment have weakened due to the deteriorating trend of consumer and business confidence. In France, the economy is decelerating as consumption, which had showed a high growth rate, leveled off due to a decline in consumer confidence. Euro Area exports have slackened sharply due mainly to the effect of the appreciation of the Euro since last autumn. On the other hand, prices remain generally stable and the effect of a rise in crude oil prices is very small.
In order to cope with the decelerating economy, the European Central
Bank (ECB) decided to cut the key interest rate (minimum bid rate for the
main refinancing operations) by 0.25 percentage points to 2.50% on March
6. The European Commission forecast the economy to continue to decelerate
with the growth rate for the January-March quarter at minus 0.1%~plus 0.3%
over the previous quarter.
International financial situations
As for the international financial situations, U.S. stock prices have fallen slightly and long-term interest rates have declined since early February, reflecting the tightening situation over Iraq and a rise in uncertainty over the future of the U.S. economy. The dollar has depreciated after strengthening in early February.
Crude oil prices were on an upward trend, reflecting the tightening
situation over Iraq. They surged to the highest level since the autumn
of 1990 in late February.