Monthly Economic Report (November 2004)

Assessment of the current state of the Japanese economy

  The economy continues to recover, while some weak movements are seen recently.
  As for short-term prospects, the economic recovery is expected to continue as 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, and to the world economic situations 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."

  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

  The growth rate of Real GDP (Gross Domestic Product) in the third quarter of 2004 was 0.1% (at an annual rate of 0.3%) on a quarter to quarter base (a positive growth for 6 consecutive quarters), despite the negative growth of Net Exports (Exports minus Imports) of Goods and Services and Public Fixed Capital Formation, mainly because of the growth of Private Final Consumption Expenditure. Nominal GDP remained unchanged from the previous quarter.

Private consumption is increasing moderately.
  Private consumption is increasing moderately. This reflects 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 gain in September from the previous month.
  Among individual economic indicators for September, the Family Income and Expenditure Survey shows that real consumption expenditure decreased from the previous month. Out of sales indicators, retail sales increased from the previous month due mainly to the increase in motor vehicles sales, although the effects of typhoons and lingering summer have been seen. Home appliance sales decreased from a year earlier due mainly to sluggish sales of personal computers, but sales of DVD players and LCD/PDP TVs continued to be brisk. New car sales decreased in October from the previous month after posting a month-to-month increase in September. 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 increases in demand. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side indicator of business investment, shows that business investment in manufacturers, which decreased in the April - June quarter from the previous quarter, is on an increasing trend and it has increased for three consecutive quarters in non-manufacturers. Shipment of capital goods, which is a supply-side indicator of machinery equipment investment, has been decreasing slightly of late due mainly to the decrease of semiconductor manufacturing equipment. Software investment is moderately increasing. The Synthetic Business Investment Index, which synthesizes the demand-side statistics and the supply-side statistics, has been 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 the increase rates have been the highest since 1989 for large manufacturers, and since 1991 for smaller manufacturers, for the survey in September. And corporations' sense of excess capacity, which indicates future business investment, has continued its improvement. As for leading indicators, machinery orders have been weakening partly in reaction to sharp increases in the April - June quarter. Construction work planned are on an increasing trend. Business investment is expected to remain on an increasing trend, as corporate profits are expected to continue their improvement.

Housing constructionhas been increasing recently.
  Housing construction has been increasing recently. This is because construction of owned houses and houses for sale increased, and construction of houses for rent moved steadily. In September, housing construction increased 7.3% from the previous month to an annual rate of 1.259 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, public works orders, the public works contract value, and orders received by 50 major companies in the July - September quarter of 2004 decreased from a year earlier, as they did in the previous quarter.

Exports have been weakening recently. Imports have increased moderrately. The surplus in the trade and services balance has been flat.
  Exports have been weakening recently. By region, exports to Asia have been on a moderate increasing trend, although exports to China, mainly of general machinery, decreased. Exports to the U.S. as a whole have remained flat, as transportation equipment increased while general machinery decreased. Exports to the EU, mainly of transportation equipment, have been slightly decreasing. As for the outlook for exports, attention needs to be paid to the movement of exchange rates, although exports are expected to increase moderately in line with the steady recovery in the world economy.
  Imports, mainly of mineral fuels and machinery equipment, have increased moderately. By region, imports from Asia, mainly of mineral fuels and machinery equipment, have increased. Imports from the U.S. have increased moderately as a whole, as machinery equipment and chemical products increased. Imports from EU, mainly of machinery equipment, decreased.
  As for the international balance of payments, the surplus in trade balance decreased, as exports in volume have been declining somewhat recently and imports have moderately increased. On the other hand, the surplus in the goods and services account has become flat, as the deficit in services, has been on a declining trend.

2. Corporate activities and employment

Production is levelling off.
  Industrial production is leveling off, as production adjustment movement of information-related producer goods continues and exports have been decreasing slightly of late. Inventory remains at a low level as a whole.
  As for the prospects of industrial production, the adjustment movement is expected to be limited as the world economy has been recovering steadily and inventory remains at a low level as a whole, although attention needs to be paid to the inventory adjustment movement of information-related producer goods. The Survey of Production Forecasts indicates industrial production is expected to increase both in October and November.
  Tertiary industry activities are increasing moderately.
  As for agricultural production, the paddy rice crop situation index (as of October15) stood at "98," a slightly lower level than an average year.

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 in the April-June quarter of 2004 have posted a year-to-year increase of 34.3% as sales are increasing, which has been continuing for eight consecutive quarters since the July-September quarter of 2002. According to the BOJ tankan survey, both manufactures and non-manufactures are planning to increase in profit for three consecutive years in fiscal 2004. They upgraded the profit projection in the first half of the fiscal year and expect to post a further increase in the second half as well.
  The BOJ tankan survey also shows that business sentiment has been further improving. The diffusion index turned upward 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 1991 for September.

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 September declined 0.2 percentage points from the previous month to 4.6%. Both of unemployed and employed persons have decreased in number. Although the movement of persons entering the labour market has recently been seen, the number of persons not in the labor force increased in this month. 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 is increasing. The effective ratio of job offers to applicants has been on a moderate upward trend. The number of employees has been on a moderately increasing trend. Overtime hours worked in the manufacturing industry have been flat.
  The underlying trend of contractual cash earnings has remained flat.

3. Prices and the financial market

Domestic corporate goods prices have been on an upward trend 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, prices of petroleum and chemical products have been rising, reflecting a rise in crude oil prices, and iron & steel and nonferrous metals increased due to a rise in domestic and overseas commodity markets, while agricultural and marine products and electrical machinery & equipment declined. 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 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 increased due mainly to a rise in prices of petroleum products. General services prices and public utility charges remained generally flat.
  Although domestic corporate goods prices have been rising, consumer prices remain on a slightly declining trend compared with the previous year. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.

Stock prices, after having been weak, have recovered around 11,000 yen (the Nikkei average). The yen has appreciated against the U.S. dollar.
  Stock prices, which had been weak reflecting uncertain outlook for the domestic and international economies, have recovered around the 11,000-yen level (the Nikkei average) as the reactionary fall of crude oil was favorably accepted in the markets. The yen against the U.S. dollar temporarily rose to the 105 yen level due mainly to concerns about the expansion of U.S. current-account deficits.
  Short-term interest rates are stable. Long-term interest rates have moved around the 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 is easing. The growth rate of the M2+CD money supply has been increasing moderately since September.

4. Overseas economies

The world economy has been recovering steadily.

In the United States, the economy is expanding.
  The annual growth rate of GDP in the July - September quarter was 3.7% from the previous quarter, which was mainly driven by the annual growth rate of 4.6% in consumption and the 11.7% in investment. Against the background of this continuation of the economic expansion, nonfarm payroll employment sharply increased to 337,000. Consumer sentiment has declined for three consecutive months as uncertain outlook for energy prices and the employment situation may remain.
  Mr. Bush was re-elected at the U.S. presidential election in early November, and showed a positive stance on various reforms, including of the tax code and the social security system.
  At its meeting held on November 10, the Federal Open Market Committee decided to raise its target for the federal funds rate by 25 basis points to 2% and restated 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 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, the benchmark rate for one-year lending was raised, for the first time in nine years, by 0.27 percentage points on October 28, in addition to the existing measures, which had been taken to control investment in fixed assets. 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.

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 Germany, the economy is recovering moderately, although the growth rate declined due to decrease of external demand in the July - September quarter. In France, the economy is recovering. Both of consumption and investment are rising slowly, and industrial production is increasing moderately. In November, the euro hit the highest level against the dollar since it was launched in January 1999, becoming a cause for concern in the future.
  In the U.K., the economy has been recovering steadily, with consumption continuing to increase. On the other hand, industrial production has been decreasing recently.

International financial situations
  As for the international financial situations, stock markets in the world, which had been declining until mid-October, have been rising, reflecting the reactionary fall of crude oil and the results of US presidential election. Long-term interest rates in major countries have also been rising since late October. The U.S. dollar has depreciated.
  Oil prices have been declining after hitting the record-high level in late October.