Monthly Economic Report (September 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

  The growth rate of Real GDP (Gross Domestic Product) in the second quarter of 2004 was 0.4% (at an annual rate of 1.7%) on a quarter to quarter base (a positive growth for 5 consecutive quarters), supported by the growth of Private Final Consumption Expenditure and Net Exports (Exports minus Imports) of Goods and Services. The growth rate of Nominal GDP was 0.3% lower than in the previous quarter (the first negative growth in 5 quarters).

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 a slight gain in July from the previous month.
  Among individual economic indicators for July, 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 food & beverages retail caused by extremely hot summer, although sales at department stores and supermarkets decreased. Home appliance sales increased from a year earlier, as sales of DVD players and thin-shaped TVs remained brisk mainly due to the Olympics effect, as well as seasonal home appliance, such as air conditioners, although sales of personal computers decreased. New car sales increased from a year earlier both in July and August. Overseas travel increased from a year earlier, although domestic travel decreased from a year earlier. Eating out continued to post 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 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 generally picking up, although it declined in July from the previous month.
  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 increasing. 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 increased, and construction of houses for rent and houses for sale moved steadily. In July, housing construction increased 5.4% from the previous month to an annual rate of 1.242 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 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 the budgetary conditions of the state and local governments.

Exports and Imports are both increasing moderately. The surplus in the trade and services balance is slightly increasing.
  Exports are moderately increasing. By region, exports to Asia have remained on an increasing trend but at a slightly slower pace, as exports to China, mainly of iron & steel, are decreasing. Exports to the U.S. have remained flat as exports of transportation equipment decreased, although exports of general machinery increased. Exports to the EU, mainly of transportation equipment, 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 and mineral fuels, have increased moderately. By region, imports from Asia have increased moderately. Imports from the U.S., which increased in machinery equipment, have become almost flat. Imports from the EU, mainly of machinery equipment, increased.
  As for 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 moderately increased and imports have also moderately increased.

2. Corporate activities and employment

Industrial 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 in information-related producer goods due to increase in inventory . Inventory remains at a low level as a whole.
  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 awhole, 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 August and September.
  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 eight consecutive quarters since the July-September quarter of 2002. Both manufactures and non-manufactures increased in profits by more than 30%, reflecting the increase in sales. Corporate profits in all industries of all sizes increased 34.3% in the April - June quarter of 2004, which is the highest growth rate in 16 quarters. 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 1,200, which is the lowest level since 1995 for July.

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 July rose 0.3 percent point from the previous month to 4.9%. The number of unemployed workers increased as the number of people entering the labour market as well as leaving their jobs voluntarily increased 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 offer has been flat. The effective ratio of job offers to applicants has been rising moderately. The number of employees, which had been on an increasing trend, grew at a sluggish pace. Overtime hours worked in the manufacturing industry have been flat. The proportion of business establishments that implemented employment adjustment, such as "overtime restrictions," in the April - June quarter decreased.
  The underlying trend of contractual cash earnings has remained flat. The total special cash earnings of June and July, 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 petroleum and chemical products have been rising, reflecting a rise in crude oil prices, and iron & steel and scrap metal increased due to a rise in domestic and overseas commodity markets, 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 due to a rise in prices of petroleum products. General services prices remained generally flat. Public utility charges decreased at a faster pace from a year earlier as the amount of increase for the hike in tobacco tax last year has run its course.
  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 level (the Nikkei average). Long-term interest rates declined.
  Stock prices, which had temporarily been weak on concerns of the high-price of crude oil and the preliminary GDP figures for the April - June quarter of Japan, have moved back to the 11,000-yen level (the Nikkei average). The yen, which had temporarily appreciated slightly against the background of concerns about the U.S. economic deceleration, generally moved slightly and has been recently moving around the 110 level.
  Short-term interest rates are stable. Long-term interest rates declined against the background of a declining expectation on a breakaway from deflation. 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 been generally easing. The growth rate of the M2+CD money supply, which had been on a moderate increasing trend since January, has become flat recently.

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, and nonfarm payroll employment, which had been increasing at a slower pace for the recent months, increased by 140,000 in August. Private consumption has remained on a moderate increasing trend, but consumer confidence decreased, against the background of the slower increase of employment until July.
  As for short-term prospects, the U.S. economy is forecast to post a growth rate of around 4%. One of the risk factors for the future economy is the continuation of a high level of crude oil prices.

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 consumption continuing to increase and a pickup in production.

International financial situations
  As for the international financial situations, stock markets in the Unites States and Europe increased, after declining in mid- August. Long-term interest rates in major countries have increased following the release of US employment statistics, after moving on a downward trend till late August. The U.S. dollar is moving sideways.
  Oil prices, which had kept hitting the highest-ever level due to concerns about terrorism and demand-supply tightening, have declined since late- August, reflecting receding concerns about the supply.