Monthly Economic Report (October 2004)

Assessment of the current state of the Japanese economy

  The economy is recovering at a solid pace.
  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

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 August from the previous month.
  Among individual economic indicators for August, the Family Income and Expenditure Survey shows that real consumption expenditure increased from the previous month. Out of sales indicators, retail sales slightly decreased from the previous month, partly in reaction to the increase in food & beverages retail caused by extremely hot summer and the effects of typhoons. Home appliance sales decreased from a year earlier. Seasonal home appliance, such as air conditioners, etc. decreased in reaction to the sharp increase in September, although sales of DVD players and LCD/POP TVs remained brisk. New car sales increased from a year earlier both in August and September. Overseas travel increased from a year earlier, although domestic travel decreased from a year earlier. Eating out decreased from a year earlier, as the number of visitors reduced due mainly to the effects of typhoons.
  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, 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 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 small 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, which have been weakening partly in reaction to sharp increases in the April - June quarter, are on an increasing trend. Construction work planned are increasing. 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 increased, and construction of houses for rent and houses for sale moved steadily. Housing construction in August, after increasing 5.4% in July from the previous month, decreased 5.5% from the previous month to an annual rate of 1.174million 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 April - June quarter of 2004 decreased from a year earlier, as they did in the previous quarter.
  Public investment in the July -September 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 July and August, as well as of the budgetary conditions of the state and local governments.

Exports and Imports are both increasing moderately. The surplus in the trade and services balance has been flat.
  Exports are moderately increasing. By region, exports to Asia have increased moderately, as exports to China, mainly of chemical products and electrical machinery & equipment, increased. Exports to the US, mainly of general machinery, have increased moderately. Exports to the EU have remained on an increasing trend but at a slightly slower pace as a rise in electrical machinery & equipment has come to a halt. 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 mineral fuels, have increased moderately. By region, imports from Asia as a whole have remained flat, although foods increased. Imports from the U.S, mainly of machinery equipment, have increased moderately. Imports from the EU, mainly of machinery equipment, have increased moderately.
  As for the international balance of payments, the surplus in the goods and services account has been flat, as the deficit in the services account increased, while both exports and imports in volume have moderately increased.

2. Corporate activities and employment

Production is increasing moderately.
  Industrial production is increasing moderately. Supported by exports and business investment, industrial production remains on an increasing trend, but adjustment of production can be seen due to increase in inventory in information-related producer goods. Inventory remains at a low level as a whole, although it increased in iron and steel industry, etc. due to the effects of typhoons.
  As for the prospects of industrial production, the increasing trend is expected to continue 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 that industrial production is expected to increase in September but is expected to decrease in October.
  Tertiary industry activities are increasing moderately.
  As for agricultural production, the paddy rice crop situation index (as of September 10) stood at "101," a level in 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 August.

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 August declined 0.1 percentage points from the previous month to 4.8%. The number of unemployed persons decreased, and the number of employed persons increased. The number of persons entering the labour market continued to increase along with the improvement in the employment situation. 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 moderate increasing trend. Overtime hours worked in the manufacturing industry have been flat. 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. The total special cash earnings from June to August, including summer bonuses, decreased from a year earlier, but the monthly wages on an average 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 iron & steel and nonferrous metals increased due to a rise in domestic and overseas commodity markets and petroleum and chemical products have been rising, reflecting a rise in crude oil prices, while 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 been declining at a slower pace than in the previous year as prices of products increased and Textiles declined at a slower pace than in the previous year. General services prices and public utility charges remained generally flat.
  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 moved around 11,000-yen (the Nikkei average). Long-term interest rates have generally moved sideways.
  Stock prices, which once continued to drop for 9 consecutive business days reflecting the high-price of crude oil and the uncertain outlook for the domestic and international economies, have recovered the 11,000-yen level (the Nikkei average),mainly because the BOJ tankan survey of September was favorably accepted in the markets. The yen against the U.S. dollar has been moving in the range of 109 and 111 levels recently.
  Short-term interest rates are stable. Long-term interest rates, which temporarily declined reflecting the decline in the stock prices, are generally 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 both monetary base and M2+CD money supply have moved sideways.

4. Overseas economies

The world economy has been recovering steadily.

In the United States, the economy is expanding.
  Production has been increasing and indices of business activities are at a high level. Against the background of these strong business activities, employment has been on an increasing trend. Consumer sentiment has declined for two consecutive months, as employment increased at a slower pace and a high level of crude oil prices continued, and growth of consumption has recently become sluggish partly due to temporary factors such as weather.
  As for short-term prospects, the U.S. economy is forecast to post a growth rate at 3.5 - 4% range. The risk factors of the future US economy may include the continuation of high level of crude oil prices.
  At its meeting held at the end of September, the Federal Open Market Committee decided to raise its target for the federal funds rate by 0.25 percentage points to 1.75% 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. The growth of investment in fixed assets (accumulated from the beginning of the year), which had been increasing at a slower pace, has become flat recently. 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.
  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. In France, the economy is recovering. Both of consumption and investment are rising slowly, and industrial production is increasing moderately.
  In the U.K., the economy has been recovering steadily, with consumption continuing to increase. On the other hand, housing market is beginning to cool as housing investment decreased and house prices increased at a slower pace.

International financial situations
  As for the international financial situations, the U.S. stock prices have been on a downward trend due mainly to a high level of crude oil prices. Stock prices in Europe have been rising moderately. Long-term interest rates in major countries declined, after increasing in early October. The U.S. dollar has depreciated.
  Oil prices, which increased due to political uncertainty in several oil-producing countries and the effects of hurricanes on oil-related facilities in the United States, keep hitting a record-high level.