Monthly Economic Report (June 2004)

Assessment of the current state of the Japanese economy

  The economy continues recovering steadily with improvement in the corporate sector advancing.
  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. Furthermore, an improvement in the employment situation is a factor to sustain the economic recovery. On the other hand, attention should be given to an effect which developments of oil prices in particular have on both domestic and overseas economies.

Policy stance

  The Government made a cabinet decision on the "Basic Policies for Economic and Fiscal Management and Structural Reform 2004" on June 4 in order to expand fruits of the reforms and complete the intensive adjustment period, and to focus on consolidating the fundamentals for new growth. Acceleration and expansion of structural reforms will be pursued through early implementation of the Basic Policies.

  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 picking up.
  Private consumption is picking up. Behind this are the facts that income has become roughly flat and that consumer confidence has improved. 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 continued to pick up and posted a gain in April from the previous month.
  Among individual economic indicators for April, the Family Income and Expenditure Survey shows that real consumption expenditure increased from the previous month. Out of sales indicators, retail sales decreased from the previous month, as sales of automobiles posted a decrease. 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 May from the previous month after decreasing in April. Both domestic and overseas travels increased from a year earlier, partly due to the fact that national holidays didn't fall on Saturday and Sunday during the Golden Week.
  As for short-term prospects, private consumption is expected to recover 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 remains generally flat.The Synthetic Business Investment Index, which synthesizes the demand-side statistics and the supply-side statistics, has been generally picking up, as it increased in April 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, construction work planned are on an increasing trend, although machinery orders have been recently weakening especially in the non-manufacturing industry, partly in reaction to sharp increases in the October - December quarter. Business investment is expected to remain on an increasing trend for the immediate future, 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, which had been increasing recently, declined. In April, housing construction decreased 6.7% from the previous month to an annual rate of 1.117 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 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 January - March quarter of 2004 decreased from a year earlier, as they did in the previous quarter.
  Public investment in the April - June 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 April 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, 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 are moving sideways. The surplus in the trade and services balance has been flat.
  Exports have increased. By region, exports to Asia, mainly of general machinery, have increased. Exports to the U.S. as a whole have remained flat, as transportation equipment decreased. Exports to the EU, mainly of precision instruments, have generally increased. 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. By region, imports from Asia, which increased mainly in machinery equipment, have remained on a moderate increasing trend. Imports from the U.S., which increased in machinery equipment, have been on a moderate decreasing trend. Imports from the EU have been flat.
  Looking at the international balance of payments, the surplus in the goods and services account has become flat, as the deficit in the services account increased due to a rise in the number of Japanese tourists abroad, although exports in volume have increased and imports have become flat.

2. Corporate activities and employment

Industrial production is increasing.
  Industrial production is increasing. 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 on the strength of the steady recovery in the world economy. Judging from the inventory cycle, industrial production is not in the adjustment phase. The Survey of Production Forecasts indicates industrial production is expected to increase in May but is expected to decrease in June.
  Tertiary industry activities are increasing moderately.

Corporate profits have increased markedly. Firms' judgment on current business conditions shows signs of improving widely. 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. 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 is decreasing. The number of corporate failures was less than 1,100, which is the lowest level since February 1999.

The employment situation is improving though some severe aspects remain.
  The employment situation is improving, though some severe aspects remain. The unemployment rate is, while remaining at a high level, on a downward trend.
  The unemployment rate in April remained the same level as the previous month of 4.7%. Although the number of unemployed persons increased, the unemployment rate remained the same level because the number of employed persons also increased. The number of involuntary unemployed has been on a downward trend. On the other hand, there are severe situations as the unemployment rate of age group between 15 and 24 years old exceeds 10%.
  Both of the number of new job offers and the effective ratio of job offers to applicants have been flat. The number of employees has increased, and overtime hours worked in the manufacturing industry have been flat. The proportion of business establishments that implemented employment adjustment, such as "overtime restrictions," which had been on a downward trend, remained the same level as the previous quarter in the January-March quarter.
  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, which have been on a slight upward trend, posted a month-to-month increase for seven consecutive months. This is the first movement since February 1991 when domestic corporate goods prices increased for nine consecutive months from June 1990. Breaking down the recent trend by type of goods, prices of petroleum & coal products and iron & steel, etc. have been rising due to a rise in materials prices. Import prices (yen basis) have been rising, reflecting a rise in the international commodity market and the depreciation of the yen to date. 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 remained generally flat. Prices of general services are increasing due to a rise in eating out, etc. Public utility charges declined on a year-to-year basis, as the effects of hike in self-pay ratio of medical insurance last year has run its course.
  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 11,000-yen level (the Nikkei average) after rising. Long-term interest rates have risen.
  Stock prices, which had temporarily been in a correction phase reflecting concerns about a rise in oil prices, etc., have moved above the 11,000-yen level (the Nikkei average) on expectations of economic recovery. The yen appreciated and has been moving around the 110 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. 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 become flat. 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.
  The U.S. economy achieved a high growth rate of more than 4% for three consecutive quarters to the January - March quarter. Production has been increasing and capacity utilization rate has been rising. Against this background employment is increasing.
  Nonfarm payroll employment in May increased by around 250,000, after increasing sharply for two consecutive months.
  Gasoline prices continue to be at a high level, but the effect of such high price on consumer sentiment has been so far limited, due to improvement in the employment situation.

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. On the other hand, in some sectors, investment is increasing at a high level. Accordingly the measures are taken such as tight monetary policy. 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.
  In the Euro area, the economy is recovering moderately. In the January - March quarter, the growth rate increased due mainly to increases in consumption and external demand. 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. In France, the economy is recovering. Consumption and investment are increasing, and the economic recovery led by internal demand is continuing.
  In the U.K., the economy has been recovering steadily, with the unemployment rate remaining at a low level and consumption continuing to increase. The Bank of England raised its policy rate ("repo rate") by 0.25 percentage points to 4.50% in early June.

International financial situations
  As for the international financial situations, stock markets in the world have increased since late May, reflecting a steady and continuous recovery of the world economy. Long-term interest rates in major countries have continued to increase moderately. The U.S. dollar has depreciated.
  Oil prices, which had temporarily risen to the highest-ever level due to concerns about terrorism in oil producing areas in the Middle East and demand-supply tightening, have declined after the OPEC ministers agreed to lift ceiling on its oil production at their extraordinary meeting in early June.