Monthly Economic Report (November 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 US 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."

  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 September from the previous month.
  Among individual economic indicators, the Family Income and Expenditure Survey shows that real consumption expenditure increased slightly from the previous month. Out of sales indicators, retail sales is flat from the previous month. Chain store sales remained below the level of the previous year. Department store sales remained below the level of the previous year due to unseasonable weather. New car sales increased from a year earlier for the first time in seven months due to the effect of new models in autumn. Home appliance sales increased from a year earlier thanks to a pickup in sales of personal computers, one of the major home appliance items, and to brisk sales of DVDs and digital cameras. Domestic travel decreased from a year earlier. Overseas travel continued to decrease from a year earlier, but the margin of decline narrowed.
  As for short-term prospects, 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, although it has posted a slight decrease recently, 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 in fiscal 2002 remained below 1.2 million units for two years on end, as consumer sentiment on acquisition of houses had 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 has remained roughly flat since the beginning of fiscal 2003, although it posted a temporary rise and decrease. In September, housing construction rose 6.3% from the previous month to an annual rate of 1.127 million units thanks to increases in construction of owned houses, houses for rent, and houses for sale. 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 in October decreased from a year earlier and in view of the budget situations of the state and local governments.

Exports are showing a trend of an incipient recovery. Imports are increasing at a slower pace. The surplus in the trade and services balance is flat.
  Exports are showing a trend of an incipient recovery. By region, exports to Asia as a whole increased moderately, as exports to China and ASEAN, mainly of machinery equipment, picked up. Exports to the U.S. as a whole have remained flat, as exports of transportation equipment have increased recently. Exports to the EU, mainly of transportation 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 growing signs of recovery in the world economy.
  Imports, mainly of machinery equipment, are increasing moderately as business investment has been increasing. By region, imports from Asia, mainly of machinery equipment, are increasing. Imports from the U.S., especially of machinery equipment such as aircraft, are decreasing. Imports from the EU have been generally decreasing, 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, although the increase in import volume has become moderate and exports in volume have picked up.

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, as export is showing trend of an incipient recovery. Although inventory is at a low level, corporations are cautious about inventory building. Incidentally, several factory fires that broke out in September did not become a major factor to reduce industrial production as a whole.
  As for the prospects of industrial production, the recovery is expected to continue through exports on the strength of the recovery in the U.S. economy, as inventories are expected to have little downward pressure on production. Incidentally, the Survey of Production Forecasts indicates industrial production is expected to increase both in October and November.
  Tertiary industry activities remain flat.
  As for agricultural production, the paddy rice crop situation index (as of October 15) stood at "90," or far below average, due to the effects of low temperatures and lack of sunshine.

Corporate profits have continued to improve. Firms' judgement on current business conditions shows improvement. The number of bankrupt companies is decreasing moderately.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits in the April-June 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 posted a year-on-year increase in the 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, including electrical machinery and steel manufacturers, is expected to post a double-digit year-on-year profit increase in the first and second half of 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.
  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 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.

While the employment situation still remains severe with the unemployment rate remaining at a high level, 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 September remained unchanged from the previous month at 5.1%. During the period from July (unemployment rate at 5.3%) to September, the unemployment rate declined as the number of unemployed persons decreased, but the number of persons not in the labor force increased.
  The number of job offers has been on an increasing trend. The effective ratio of job offers to applicants has been rising moderately. The number of employees has been on an increasing trend, although it dropped in the last two months. Overtime hours worked in the manufacturing industry have been on a rising trend.
  In September, contractual cash earnings increased 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 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 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 declined at almost the same pace as in the previous year, but prices of rice have been rising recently and prices of general food products have been declining at a slower pace than in the previous year. 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.

The yen has been traded at the 109 level against the U.S. dollar recently. Stock prices have moved above the 10,000-yen level (the Nikkei average) mostly.
  The yen, which had appreciated sharply against the U.S. dollar in late September, hit the 107 yen level temporarily in late October, before moving at around the 109 yen level. Stock prices rose, with the Nikkei average hitting this year's high in mid-October before moving mostly above the 10,000 yen level.
  Short-term interest rates are stable. Long-term interest rates moved sideways, standing at the 1.3% level recently. Enterprises' financial conditions have remained almost unchanged, and the yield spread between corporate and government bonds has remained flat.
  The growth of the monetary base has remained high (at 17.4% 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, especially of the U.S. and China, shows further growing signs of recovery.

In the United States, the economy is recovering strongly
  In the third quarter, the U.S. economy grew at an annual rate of 7.2% from the previous quarter, the highest growth rate in 19 years. The strong performance is attributed to a 6.6% rise in consumption thanks to a 25 billion dollar tax-cut package and an 11.1% rise in business investment. The labor productivity has continued to post a high growth rate.
  Private consumption has remained generally on a rising trend, although spending, especially on durable goods, decreased recently. Consumer sentiment is improving, as employment is picking up.
  Business investment in IT and in other fields has been rising, and orders for capital goods have increased. Production has been increasing moderately.
  The Federal Open Market Committee (FOMC) at its meeting held in late October reconfirmed its accommodative monetary policy to be maintained for a considerable period, referring to the probability of an unwelcome fall in inflation exceeding that of a rise in inflation from its undesirably low level.

Asia has seen continued economic expansion in China and Thailand , and some other Asian economies show signs of picking up.
  In China, the economy has been expanding due to a steady increase in consumption, investment, and high growth of export. Thailand is continuing economic expansion led by consumption and investment. Malaysia's economic expansion is slowing due to sluggish consumption and exports. In Taiwan, the economy is picking up, with consumption recovering and exports increasing. In Singapore, the economy shows signs of picking up, with production and exports turning up. In South Korea, the economy is in recession due to stagnant consumption and a decline in business investment, but production shows signs of picking up led by an increase in exports, mainly to China.

The Euro area economy shows movements of picking up the U.K.economy is picking up.
  In the euro area, the economy shows movements of picking up, with exports by major countries improving. In Germany, the economy shows signs of stopping contracting, as exports have picked up backed by an increasing trend of orders received from abroad against the background of the rising growth rate of the U.S. economy. The economic growth rate turned to be positive in the third quarter after three quarters of negative growth. The French economy shows signs of picking up, with exports picking up and production stopping decreasing.
  In the U.K., the economy is picking up, with consumption increasing. The Bank of England raised the official interest rate (repo rate) by 0.25 percentage points to 3.75% in early November in view of a pickup in economic growth and continued strong credit growth.

International financial situations
  As for international financial situations, U.S. stock prices remained on a rising trend backed by strong corporate performance. Asian and European stocks are also on a rising trend. Long-term interest rates are rising worldwide, reflecting economic recovery in major countries. The U.S. dollar leveled off generally since early October.
  Oil prices remained generally flat, although they rose temporarily on market perceptions of demand-supply tightening ahead of winter.