Monthly Economic Report (April 2005)

Assessment of the current state of the Japanese economy

  The economy is recovering at a moderate pace, while some weak movements continue to be seen.
  As for short-term prospects, the economic recovery is expected to remain solid with steady recovery in the world economy, as the corporate sector continues to be resilient. On the other hand, attention should be given to the inventory adjustment in the IT related area and to the developments of crude oil prices and other factors.

Policy stance

  Acceleration and expansion of structural reforms will be pursued through early implementation of "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2004." Following the approval by the Diet of the FY2005 budget and related legislation such as the tax reform bill, steady disbursement and implementation of these measures will be made.

  The Government, with the Bank of Japan, will further strengthen its policy efforts to ensure a breakaway from deflation in the concentrated consolidation period.

Detailed explanations

1.Demand trends such as consumption and investment

Private consumption is showing movements of a pick up.
  Private consumption is showing movements of a pick up. Behind this there are the facts that income shows further steadiness and that consumer confidence has continued to improve. The Synthetic Consumption Index, which synthesizes demand-side statistics (Family Income and Expenditure Survey, etc.) and supply-side statistics (Indices of Industrial Producer's Shipment, etc.) decreased in February due to a reaction to the large increase of the previous month, but is moderately increasing as a trend.

  As for short-term prospects, private consumption is expected to increase if improvement of the employment situation leads to improvement of the income environment.

Business investment is increasing moderately.
   Business investment is increasing moderately due to an improvement in corporate profits. The Synthetic Business Investment Index, which synthesizes the demand-side statistics and the supply-side statistics, has been moderately picking up.

  According to the Bank of Japan short-term business sentiment survey (tankan), business investment in fiscal 2005 is planned to increase for three consecutive years. Business investment is expected to remain on an increasing trend, as corporate profits have been continuing to improve.

Housing constructionhas been increasing recently.
  Housing construction has been increasing recently. This is because construction of houses for rent increased and construction of houses for sale moved steadily, although construction of owned houses has been decreasing slightly of late. Housing starts are expected to move steadily if the income environments in households recover along with the improvement in the employment situation.

Public investment has been generally sluggish.
  Public investment has been generally sluggish. However, the supplementary budget has had the effect of increasing construction related to disaster-relief.

Exports have been weakening. Imports have been flat. The surplus in the trade and services balance has been flat.
  Exports have been weakening. By region, exports to Asia as a whole have been weakening. Exports to the US are recovering. Exports to the EU have been weakening.
  Imports have remained flat as a whole as mineral fuels, machinery equipment, etc. decreased, while fiber products, etc. increased. By region, imports from Asia, have moderately increased. Imports from the US have moderately increased. Imports from the EU have moderately decreased.
  As for the international balance of payments, the surplus in trade balance has remained almost flat, as exports in volume have weakened and imports have been flat. Meanwhile, the surplus in the goods and services account has become flat, as the deficit in the services account has been almost flat.

2. Corporate activities and employment

Production is leveling off.
  Industrial production is leveling off, reflecting resumption of capital goods and progress of production adjustment of information-related producer goods. Inventory levels remain low as a whole.

  As for short-term prospects, industrial production is expected to pick up with progress of production adjustment of information-related producer goods, reflecting steady recovery of the world economy.

Corporate profits are improving. Firms' judgment on current business conditions shows signs of caution. The number of bankrupt companiesis decreasing.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, a year-to-year increase of 17.6% was posted for corporate profits in the October-December quarter of 2004, which has been continuing for 10 consecutive quarters, although the growth rate has slowed compared to the previous quarter, reflecting production adjustment movement of IT-related goods. According to the BOJ tankan, both manufactures and non-manufacturers expect an increase in profit for the fourth consecutive year in fiscal 2005.

   The BOJ tankan also shows signs of caution in business conditions. Increases in material prices and production adjustments in IT-related goods led to a fall in business conditions for the second consecutive quarter.

  The number of bankrupt companies is decreasing. The number of bankruptcies fell below 1,100, marking the lowest level for February since 1992.

The employment situation is improving, though some severe aspects remain.
  Although the total unemployment rate is at a high level, it is on a downward trend.
  The number of new job offers has been on an increasing trend. The effective ratio of job offers to applicants has been on an increasing trend. The number of employees has been improving. Overtime hours worked in the manufacturing industry have been flat. Diffusion index in employment condition showed the first shortage in all sized enterprises and industries for the first time since November 1992.
  As for movement on wages, contractual cash earnings has remained flat.

3. Prices and the financial market

Domestic corporate goods prices and consumer prices are both moving sideways.
  Domestic corporate goods prices have been flat.
  Consumer prices have also become flat month to month.
  However, consumer prices continued to show a slightly declining trend year-on-year.
  Taken together, these movements show that Japanese economy is in a mild deflationary phase.

Stock prices have been around 11,800 yen (Nikkei Stock Average). The yen against the U.S. dollar has been moving in the direction of depreciation from the 104-yen level to the 108-yen level.