Monthly Economic Report (August 2004)

Assessment of the current state of the Japanese economy

  The economy is recovering at a solid pace as improvements in the corporate sector are extending into the household sector.
  As for short-term prospects, the economic recovery is expected to continue as the world economy recovers and the domestic private demand increases steadily. On the other hand, attention should be given to the effects on the economies of developments of crude oil prices, global interest rates and other factors.

Policy stance

  Acceleration and expansion of structural reforms will be pursued through early implementation of "Basic Policies for Economic and Fiscal Management and Structural Reform 2004." As for formulating the FY2005 budget, the Government will further advance structural reforms, attaching importance to the clarification of the attitude for strict fiscal discipline, the emphasis on priorities in the budget allocation, and the fulfillment of its accountability to the nation.

  The Government, with the Bank of Japan, will continue to take powerful and comprehensive actions to secure stability of money and capital markets, and will further strengthen its policy efforts to ensure a breakaway from deflation after the intensive adjustment period.

Detailed explanations

1.Demand trends such as consumption and investment

Private consumption is moderately increasing.
  Private consumption is moderately increasing. Behind this are the facts that income is moving steadily and that consumer confidence has continued to improve. 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 slight gain in June from the previous month.
  Among individual economic indicators for June, the Family Income and Expenditure Survey (Workers' households) shows that real consumption expenditure increased from the previous quarter for the April - June quarter, although it declined in June from the previous month. This is due partly to the effect of typhoons and partly because disposable income is decreasing, reflecting a decrease of summer bonuses for civil servants, despite a continuing rise in regular income. Out of sales indicators, retail sales decreased from the previous month due mainly to the decrease in food & beverages retail, although sales at department stores, supermarkets and machinery & equipment retail (home appliances, etc.) increased. Home appliance sales decreased from a year earlier, but sales of DVD players and thin-shaped TVs continued to be brisk. New car sales increased in July from the previous month after posting a month - month decrease in June. Overseas travel increased from a year earlier, although domestic travel decreased from a year earlier. Eating out posted a year-on-year rise.
  As for short-term prospects, private consumption is expected to increase steadily if the income environment of households improves, as the employment situation is improving.

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 has increased for four consecutive quarters in manufacturers and it has increased for two consecutive quarters in non-manufacturers. Shipment of capital goods, which is a supply-side indicator of machinery equipment investment, is also on an increasing trend. Software investment is moderately increasing. The Synthetic Business Investment Index, which synthesizes the demand-side statistics and the supply-side statistics, has been generally picking up.
  According to the Bank of Japan short-term business sentiment survey (tankan), business investment in fiscal 2004 is expected to increase for two years on end and its increase of large manufacturers has been at the highest rate since 1988 for the survey in June. And corporations' sense of excess capacity, which indicates future business investment, has continued its improvement. As for leading indicators, machinery orders have been recently increasing, although it weakened in the January - March quarter. Construction work planned have been temporarily weakening due to a decrease of large construction plans. Business investment is expected to remain on an increasing trend, as corporate profits are expected to continue their improvement.

Housing constructionhas remained roughly flat.
  Housing construction has remained roughly flat. This is because construction of owned houses and houses for sale moved steadily, although construction of houses for rent has been decreasing slightly of late. In June, housing construction increased 0.8% from the previous month to an annual rate of 1.179 million units. Total floor space generally followed the same movement. Housing starts are expected to move steadily if income environments of households recover along with the improvement 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 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, 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.
  Reflecting this situation, the public works contract value and orders received by 50 major companies in the April - June quarter of 2004 decreased from a year earlier, as they did in the previous quarter.

Exports have increased. Imports have increased moderately. The surplus in the trade and services balance is slightly increasing.
  Exports have increased. By region, exports to Asia, mainly of precision instruments, have generally increased, although exports to China decreased. Exports to the U.S. have remained flat as exports of electrical machinery & equipment decreased, although exports of general machinery increased. Exports to the EU, mainly of general machinery, have generally increased. As for the outlook for exports, attention needs to be paid to the movement of exchange rates, although exports are expected to increase in line with the steady recovery in the world economy.
  Imports, mainly of machinery equipment, have increased moderately. By region, imports from Asia have increased moderately. Imports from the U.S. have generally decreased. Imports from the EU, mainly of machinery equipment, increased.
  Looking at the international balance of payments, the surplus in the goods and services account has increased slightly, as the deficit in the services account has become flat, while exports in volume have increased and imports have moderately increased.

2. Corporate activities and employment

Industrial production is increasing.
  Industrial production, which decreased in June, 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. Inventory remains at a low level as a whole, although some producer goods, such as electrical devices, show signs of increasing.
  As for the prospects of industrial production, the recovery is expected to continue as the world economy has been recovering steadily and inventory remains at a low level.
  The Survey of Production Forecasts indicates industrial production is expected to increase both in July and August.
  Tertiary industry activities are increasing moderately.

Corporate profits have increased markedly. Firms' judgment on current business conditions shows further improvement. The number of bankrupt companiesis decreasing.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits have posted a year-to-year increase for seven consecutive quarters since the July-September quarter of 2002. In the first quarter of 2004, corporate profits increased 24.6% on a year-to-year basis, which is the highest growth rate in 13 quarters. Current profits in all industries of all sizes have reached the highest-ever level for the January-March quarter. Among industries, the manufacturing industry continued to see its profits improving as sales are increasing, although movement of cost reductions, such as of labor cost, came to a halt. In addition, the non-manufacturing industry continued to see its profits improving, reflecting the increase in sales. According to the BOJ tankan survey, both manufactures and non-manufactures are planning to increase in profit for three consecutive years in fiscal 2004 and expect to post a further increase in the second half of the fiscal year.
  The BOJ tankan survey also shows that business sentiment has been further improving. The diffusion index emerged from negative territory in all industries of all sizes for the first time since 1992 and is at the highest level since 1991 in large manufacturing industry.
  The number of bankrupt companies is decreasing. The number of corporate failures was less than 1,100, which is the lowest level since February 1999.

The employment situation is further improving, though some severe aspects remain.
  The employment situation is further improving, though some severe aspects remain.
  The unemployment rate is, while remaining at a high level, on a downward trend.
  The unemployment rate in June remained the same level as the previous month of 4.6%. By gender, while the unemployment rate for male rose, the unemployment rate for female dropped. On the other hand, there are severe situations as the unemployment rate of age group between 15 and 24 years old is at a high level.
  The number of new job offers, whose underlying trend has been flat, increased in June. The effective ratio of job offers to applicants has been rising moderately. The number of employees, which had been on an increasing trend, decreased in June.
  Overtime hours worked in the manufacturing industry have been flat.
  As for movement on wages, the initial trend of summer bonuses, as judged from special cash earnings in June, is lower than a year earlier. On the other hand , the underlying trend of contractual cash earnings has remained flat.

3. Prices and the financial market

Domestic corporate goods prices have been rising due to a rise in materials prices, such as crude oil.Consumer prices are moving sideways.
  Domestic corporate goods prices have been on an upward trend due to a rise in materials prices, such as crude oil. Breaking down the recent trend by type of goods, the prices of petroleum products have been rising sharply reflecting a rise in crude oil price, and prices of iron & steel and metal products have continued to increase. Import prices (yen basis) have been rising, reflecting a rise in the international commodity market, such as crude oil price. Breaking down corporate goods prices by demand-stage, there is an increasing movement in intermediate goods to pass a rise in materials prices to the goods prices, and the similar movement can also be seen in the final goods.
  Corporate services prices have remained below the levels of the previous year.
  Consumer prices are moving sideways. Prices of general commodities have been declining at a slower pace than in the previous year due to a rise in prices of petroleum products. General services prices and public utility charges remained generally flat, but the amount of increase for the hike in tobacco tax last year declined in July.
  Although domestic corporate goods prices have been rising, consumer prices are slightly declining compared with the previous year. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.

Stock prices have generally moved around the low 11,000-yen level (the Nikkei average). Long-term interest rates are moving sideways.
  Stock prices have been weak and moved around the low 11,000-yen level (the Nikkei average), due to selling, mainly of technology stocks, reflecting the April- June corporate performances in Japan and the U.S. The yen against the U.S. dollar depreciated in anticipation of rising of interest rates in the U.S. etc., and has been moving in the range of 111 and 112 levels recently.
  Short-term interest rates are stable. Long-term interest rates are moving sideways. 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 is easing. The growth rate of the M2+CD money supply, which has been on a moderate upward trend since January, eased slightly in June.

4. Overseas economies

The world economy has been recovering steadily.

In the United States, the economy is expanding.
  GDP in the April- June quarter grew at an annual rate of 3.0% from the previous quarter, due mainly to an annual rate of 8.9% rise in business investment. Private consumption, which temporarily weakened in June due mainly to the decrease of retail sales, has remained on a moderate increasing trend, against the background that consumer confidence continues to be at a high level due to the improvement in the employment situation.
  The consumer price index in June increased 3.3% from a year earlier, the highest rate since May 2001, against the background of a high level of gasoline prices, while the core consumer price index ,excluding foods and energy, is stable.
  In the testimony to the Congress at the end of July, Chairman Alan Greenspan of Federal Reserve Board stated that policy accommodation can be removed that is likely to be measured, he also reiterated that the FOMC will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Asia has seen continued economic expansion in China and Thailand, and the economy is recovering in South Korea.
  In China, the economy has been expanding due to a steady increase in consumption and a rise in production caused by growth of exports. In some sectors, where there had been overheated investment activities, the control measures began to take effect. In Thailand economic expansion continues led by consumption and investment. In Malaysia, Taiwan and Singapore, the economies are expanding due to increases in consumption. In 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.
  The Euro area economy is recovering moderately, with the increase in exports and the moderate increase in production. In Germany, the economy is recovering moderately led by external demand. On the other hand, consumption is weak and a recovery of internal demand is delayed due to slow improvement of the employment situation. The French economy has been recovering, with consumption and investment increasing.
  In the U.K., the economy has been recovering steadily, with both consumption and housing investment continuing to increase.

International financial situations
  As for the international financial situations, stock markets in the Unites States and Europe declined in mid-July. Long-term interest rates in major countries have remained flat. The U.S. dollar has appreciated since the end of July.
  Oil prices have risen due to concerns about terrorism and demand-supply tightening, moving at the highest level ever after mid-July.