Monthly Economic Report (April 2004)

Assessment of the current state of the Japanese economy

  The economy continues recovering steadily with improvement in the corporate sector spreading.
  As for short-term prospects, the economic recovery in Japan is expected to continue as the world economy recovers and the domestic corporate sector improves. On the other hand, attention should be given to the developments of exchange rates in particular.

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." Following the approval by the Diet of the FY2004 budget and related legislation such as the tax reform bill, steady disbursement and implementation of these measures will be made.

  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 is picking up.
  Private consumption is picking up. Behind this are the facts that income has become roughly flat and that consumer confidence has continued to show 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.), has been generally picking up, although it declined in February from the previous month after posting an increase for two consecutive months.
  Among individual economic indicators for February, the Family Income and Expenditure Survey shows that real consumption expenditure increased from the previous month, caused in part by the effects of the extra day of the leap year. Out of sales indicators, retail sales decreased from the previous month, partly in reaction to the sharp increase due mainly to good performance of the first sale of the new year. Home appliance sales increased from a year earlier, as sales of DVD players and thin-shaped TVs continued to be brisk. New car sales increased in March from the previous month after decreasing in February. Domestic travel increased from a year earlier, although overseas travel continued to decrease on year-to-year basis.
  As for short-term prospects, private consumption is expected to recover if the income environment of households improves, as the employment situation shows movements of 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. Shipment of capital goods, which is a supply-side indicator of machinery equipment investment, is also on an increasing trend. Software investment remains generally flat. The Synthetic Business Investment Index, which synthesizes the demand-side statistics and the supply-side statistics, has been generally picking up, although it declined in February from the previous month.
  According to the Bank of Japan short-term business sentiment survey (tankan), business investment in fiscal 2004 in the manufacturing industry is expected to increase for two years on end and corporations' sense of excess capacity, which indicates future business investment, has also continued its improvement. As for leading indicators, machinery orders have been generally picking up and construction work planned, though fluctuating from month to month, has been moderately picking up on average. 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 been increasing recently.
  Housing construction has been increasing recently. Housing construction remained firm, although it suffered a month-to-month decline of 6.4% to an annual rate of 1.173 million units in February due to decrease in construction of owned houses, houses for rent and houses for sale, after rising 2.7% from the previous month, mainly in houses for rent. Total floor space generally followed the same movement. Housing starts are expected to move steadily if income environments of households improve along with the movements of an incipient recovery in the employment situation.

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 supplementary budget for fiscal 2003, public investment-related expenses decreased sharply from the previous fiscal year, as the Government appropriated only about 0.2 trillion yen for disaster countermeasures. 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 .
  Reflecting this situation, public works orders, the public works contract value, and orders received by 50 major companies in the October-December quarter of 2003 decreased from a year earlier, as they did in the previous quarter.
  Public investment in the January-March quarter of 2004 is likely to continue posting a year-on-year decrease in view of the decreases in the contracted amount of public works, etc. in January and February, and the budgetary conditions of the state and local governments.
  In the national budget for FY2004, the Government slashed public investment-related expenses by 3.3% from the previous fiscal year and prioritized budget allocations to areas that will lead to the expansion of employment and private demand, and by scrutinizing the purpose and achievements of each project. Out of local public investment expenses under the fiscal plans of local governments for fiscal 2004, those for projects undertaken by local governments on their own funding have been slashed by 9.5% from the previous year subjected to systematic curbs over a medium term and priority-based allocations will be implemented.

Exports have increased. Imports have moving sideways. The surplus in the trade and services balance is increasing slightly.
  Exports have increased. By region, exports to Asia are generally increasing, although it decreased in reaction to the strong demand for Chinese new year, Exports to the U.S., mainly of precision instruments, have remained on a moderate increasing trend, Exports to the EU, mainly of transportation equipment, have increased moderately. As for the outlook for exports, close monitoring is required for the movement of exchange rates, although exports are expected to increase in line with the steady recovery in the world economy.
  Imports, which increased especially in machinery equipment, remained flat, as imports of mineral fuels have been decreasing recently. By region, Imports from Asia, which increased especially in Textiles, remained flat, as imports of machinery equipment have been decreasing recently. Imports from the U.S. have become flat, although machinery equipment such as aircraft is temporarily decreasing. Imports from the EU have been flat.
  Looking at the international balance of payments, the surplus in the goods and services account has increased slightly, as exports in volume have increased and imports have become flat.

2. Corporate activities and employment

Industrial production is increasing.
  Industrial production, which decreased in February, is increasing as a whole. Mainly in information-related producer goods and capital goods, industrial production is increasing in broad goods, reflecting increases in exports and business investment. Although inventory remains at a low level, corporations are cautious about inventory building.
  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. Incidentally, the Survey of Production Forecasts indicates industrial production is expected to increase both in March and April.
  Tertiary industry activities are increasing moderately.

Corporate profits are improving in many industries. Improvement of firms' judgement on current business conditions also shows signs of improving widely. The number of bankrupt companies has become flat recently.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits have posted a year-to-year increase for six consecutive quarters since the July-September quarter of 2002. Among industries, the manufacturing industry, which had continued to post sharp profit increases, saw the improvement of its profits become moderate due mainly to slackening movement of cost reductions, such as of labor cost. On the other hand, the non-manufacturing industry continued to see its profits improving, reflecting the increase in sales. The Bank of Japan Short-term Business Sentiment Survey (tankan) indicated that corporate profits in non-manufacturers and even smaller companies increased in the wide range of industries in the second half of FY2003. In fiscal 2004, corporate profits are expected to increase in many industries On the whole, both manufactures and non-manufactures are planning to increase in profit for three consecutive years.
  The BOJ tankan survey shows that business sentiment continued improving. The improvement of business confidence is spreading, as business confidence for large non-manufacturers has turned positive and business confidence in the small-business sector is also improving in many industries.
  The number of bankrupt companies has become flat recently. Incidentally, the number of bankruptcies has continued decreasing in the trend of economic recovery, and came to the lowest level in five years for the month of March.

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' reduction stance of personnel expense, and structural factors, such as a mismatch between job offers and seekers.
  The unemployment rate in February remained the same level as the previous month of 5.0%. While the unemployment rate for male rose, the unemployment rate for female dropped.
  The number of new job offers still remains on an increasing trend, although it has decreased for the last two months. The effective ratio of job offers to applicants has being flat. The number of employees has picked up and overtime hours worked in the manufacturing industry have been on a rising trend. The number of corporations saying they have excess employees has been on a downward trend.
  The underlying trend of contractual cash earnings has remained flat.

3. Prices and the financial market

Domestic corporate goods prices have been on a slight upward trend due to a rise in materials prices.Consumer prices are moving sideways.
  Domestic corporate goods prices have been on a slight upward trend. Breaking down the recent trend by type of goods, prices of iron & steel, nonferrous metals, and petroleum & coal products, etc. have been rising due to a rise in materials prices, while prices of agricultural and marine products and electrical machinery & equipment decreased. Import prices (yen basis) have been rising, reflecting a rise in the international commodity market.
  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, such as rice prices. Prices of general commodities have been declining at a slower pace than in the previous year due to a rise in prices of rice, etc. On the other hand, general services prices remained generally flat. Public utility charges rose from the previous year.
  Although domestic corporate goods prices are rising slightly, price-boosting factors behind consumer prices 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 above the 12,000-yen level (the Nikkei average) after hitting year's high. The yen has appreciated against the U.S. dollar.
  Stock prices have moved above the 12,000-yen level (the Nikkei average) after hitting year's high, reflecting a rising expectation of economic recovery and improvement of corporate profits. The yen, which began to appreciate in mid-March reflecting receding concerns about foreign exchange intervention, has been moving around the 105 level against the U.S. dollar recently. Short-term interest rates are stable. Long-term interest rates rose against the background of higher stock prices, standing around 1.5%. 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 the 10% level (at 9.4% 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 increased moderately since January.

4. Overseas economies

The world economy has been recovering steadily.

In the United States, the economy is recovering strongly.
  Industrial production and corporate profits are increasing. Against the background of these current situations and brighter business outlook , business investment has continued to increase and orders for capital goods, which serves as a leading indicator for business investment,has been increasing.
  Consumer sentiment has recently declined due to uncertainty about job security of consumers, causing a moderate increase in private consumption.
  On the other hand, the employment situation is expected to improve, as the willingness to hire among corporations continues to improve, and nonfarm payroll employment increased by more than 300,000.

Asia has seen continued economic expansion in China and Thailand, and the other Asian economies are recovering.
  In China, the economy has been expanding due to a steady increase in consumption and a rise in production caused by growth of exports. On the other hand, there are concerns about overheated business activities in some sectors. In Thailand economic expansion continues led by consumption and investment. In Malaysia, the economy is expanding due to increases in consumption and exports. In Taiwan, the economy is recovering, with consumption and exports increasing. In Singapore and South Korea, the economy is recovering, with exports and production increasing.

The Euro area economy is recovering moderately, and the U.K. economy has been recovering steadily.
  In the Euro area, the economy is recovering moderately. Exports have increased moderately, supported by demand from outside the area. On the other hand, private consumption has remained flat. The German economy is picking up with a pickup in production amid increasing in orders. However, expectation for improved business activity in the future is weakening, as private consumption has continued to be weak recently. The French economy has been recovering, with moderate increase in consumption and exports.
  In the U.K., the economy has been recovering steadily, with housing investment continuing to increase.

International financial situations
  As for the international financial situations, U.S. stock prices have increased since the middle of March, reflecting a brighter outlook for the corporate performance. Stock prices in Europe and Asia have increased after declining in late March. Long-term interest rates in major countries have increased, following the release of US employment statistics. The U.S. dollar, which had been on a downward trend till late March, has appreciated.
  Oil prices, which had been declining since the middle of March, have risen after the ordinary OPEC meeting at the end of March, where OPEC ministers confirmed the policy to cut back oil production effective in April.