Monthly Economic Report (May 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. Furthermore, an improvement in the employment situation is a factor to sustain the economic recovery. On the other hand, attention should be given to the effects on overseas economies of developments of oil prices in particular.


Policy stance

  The Government intends to decide the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2004 (provisional title)" during the month of June in order to enhance accomplishments of reforms to date, to finalize the intensive adjustment period, and to strengthen economic and social bases in priority for renewed growth.

  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

  Real GDP (Gross Domestic Product) in the first quarter of 2004 was 1.4% (at an annual rate of 5.6%) higher than in the previous quarter (a positive growth for 8 consecutive quarters), mainly because of the growth of Private Consumption, Private Non-Residential.Investment, and Net Exports (Exports minus Imports) of Goods and Services. Nominal GDP was 0.8% higher than in the previous quarter (a positive growth of 4 consecutive quarters). As result, Real GDP (Gross Domestic Product) in the fiscal 2003( April 2003 - March 2004) was 3.2% ( a positive growth for 2 consecutive years), and Nominal GDP was 0.7% higher than in the previous year (the first positive growth in three years).

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 been generally picking up, although it posted a small gain in March from the previous month.
  Among individual economic indicators for March, the Family Income and Expenditure Survey shows that real consumption expenditure for the first quarter of 2004 increased from the previous quarter, although it declined in March from the previous month partly because the number of Saturdays, Sundays and national holidays was less than the previous year by three days. Out of sales indicators, retail sales have become flat in March from the previous month, but increased from the previous quarter in the first quarter of 2004. Home appliance sales decreased from a year earlier, but sales of DVD players and thin-shaped TVs continued to be brisk. New car sales decreased in April from the previous month after posting a month-to-month increase in March. Overseas travel increased from a year earlier, although domestic travel decreased from a year earlier.
  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 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 March 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 increasing, 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 construction has been increasing recently.
  Housing construction, mainly of houses for rent, has been increasing recently. In March, housing construction increased 2.1% from the previous month to an annual rate of 1.197 million units due to increase in construction of owned houses, houses for rent, although construction of houses for sale decreased. Total floor space generally followed the same movement. Incidentally, housing construction in fiscal 2003 increased 2.5% from the preceding fiscal year to 1.174 million units, posting the first increase in four years, due to increase in construction of owned houses, houses for rent and houses for sale. 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 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 is increasing slightly.
  Exports have increased. By region, exports to Asia, mainly of transportation equipment and iron & steel, have increased. 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. 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 and textiles, remained flat, as imports of mineral fuels have been decreasing. By region, imports from Asia, which increased in machinery equipment and textiles, etc., have remained on a moderate increasing trend. Imports from the U.S., which decreased in machinery equipment, are moderately 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 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 both in April and May.
  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 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 April.

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 March declined 0.3 percentage points from the previous month to 4.7%. The number of both voluntary and involuntary unemployed has decreased. On the other hand, there are severe situations as the unemployment rate of age group between 15 and 24 years old exceeds 10%.
  The number of new job offers has been on an increasing trend. The effective ratio of job offers to applicants has been flat. The number of employees has picked up and overtime hours worked in the manufacturing industry have been on a rising 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, petroleum & coal products, and metal products, etc. have been rising due to a rise in materials prices, while prices of electrical machinery & equipment and scrap & waste decreased. Import prices (yen basis) have been rising, reflecting a rise in the international commodity market. 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. On the other hand, prices of final goods are declining.
  Corporate services prices have remained below the levels of the previous year.
  Consumer prices are moving sideways. Prices of general commodities and general services have remained generally flat. Incidentally, prices of rice declined from April, but posted a year-to-year increase. Public utility charges rose on a year-to-year basis, but the amount of increase for the hike in self-pay ratio of medical insurance last year declined in April.
  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 plunged to the 10,000-yen level (the Nikkei average). The yen has depreciated against the U.S. dollar.
  Stock prices have plunged to the 10,000-yen level (the Nikkei average), reflecting an increasing expectation of monetary tightening in the United States and China. The yen has depreciated to the 114 level against the U.S. dollar due mainly to increase in the U.S. long-term interest rates.
  Short-term interest rates are stable. Long-term interest rates are generally moving sideways, 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 monetary base has remained at a high level, even though the growth has slackened in reaction to increase in operating target of Current Account Balances of the BOJ, along with the establishment of Japan Post, at the Monetary Policy Meeting held in March last year. 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.
  In the January-March quarter, the U.S. economy, due mainly to an annual rate of 3.8% rise in consumption and a 7.2% rise in business investment, grew at an annual rate of 4.2% from the previous quarter as a whole and achieved a high growth rate of more than 4% for three consecutive quarters since the July-September quarter of 2003. Employment is increasing against this high growth, and nonfarm payroll employment sharply increased for two consecutive months by around 300,000.
  Consumer price in April increased 2.3% from a year earlier, reflecting a high level of gasoline prices.
  At its meeting held in early May, the Federal Open Market Committee perceived, with its upgraded judgment on employment situations, the upside and downside risks to the goal of price stability have moved into balance, and stated that policy accommodation can be removed at a pace that is likely to be measured.

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, in some sectors, there are overheated business activities, as investment has increased sharply. Accordingly the measures are taken such as tight monetary policy. 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, the economy is recovering, with exports increasing. 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. Exports have increased moderately, supported by demand from outside the area. The German economy, with the increase of exports, is recovering moderately. The French economy has been recovering, with moderate increase in consumption and increase in exports.
  In the U.K., the economy has been recovering steadily, with a rise of house prices and consumption continuing to increase. The Bank of England raised its policy rate ("repo rate") by 0.25 percentage points to 4.25% in early May.

International financial situations
  As for the international financial situations, stock markets in the world have declined since late April, reflecting an increasing expectation of early rise of Federal Funds Target Rate by Federal Reserve System, as employment has been increasing sharply for two consecutive months in the United States. Long-term interest rates in major countries have continued to increase, and the U.S. dollar has appreciated.
  Oil prices have risen due to concerns about terrorism in oil producing areas in the Middle East and demand-supply tightening, exceeding the level of the Gulf War in mid May.