Monthly Economic Report (August 2005)

Assessment of the current state of the Japanese economy

  The economy is recovering at a moderate pace with the corporate sector as well as the household sector improving.
  As for short-term prospects, the economic recovery supported by the domestic private demand is expected to continue, as resiliency in the corporate sector is extending into the household sector. On the other hand, attention should be given to an effect which developments of oil prices in particular have on both domestic and overseas economies.

Policy stance

  Acceleration and expansion of structural reforms will be pursued based on "Basic Policies for Economic and Fiscal Management and Structural Reform 2005."

  The Government, with the Bank of Japan, will further strengthen and enhance 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 increasing moderately.
  Private consumption is increasing moderately, reflecting an improvement of consumer confidence and moderate increase of income. 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.) increased in June compared to the previous month.

  As for short-term prospects, private consumption is expected to continue to increase as improvement of the employment situation has led 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 is increasing moderately.

  According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment in fiscal 2005 is showing an increase for the third consecutive year, with increase rates in double figures for large manufacturers for the second consecutive year, and the highest levels of growth since 1991 for large non-manufacturers. Business investment is expected to remain on an increasing trend, as corporate profits have been continuing to improve.

Housing constructionhas been almost flat.
  Housing construction has been almost flat. Although construction of owned houses has been decreasing slightly of late, construction of houses for rent has moved steadily and construction of houses for sale has generally been flat despite significant fluctuations in condominium starts. 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.

Exports are picking up. Imports are increasing moderately. The surplus in the trade and services balance is decreasing.
  Exports are picking up. By region, exports to Asia have been recovering as a whole, as exports of general machinery have been recovering although exports of electrical equipment have been flat. Exports to the US are moderately increasing, with exports of transportation equipment increasing. Exports to the EU have been weakening. For short-term prospects, exports are expected to increase with the steady recovery in the world economy.
  Imports have been increasing moderately, especially for mineral fuels, textile yarn and fabrics, etc. By region, imports from Asia have been flat as imports of fiber products, etc. have increased while imports of machinery equipment, etc. have decreased. Imports from the U.S. have remained flat as machinery equipment, etc. decreased, while chemical goods, etc increased. Imports from the EU have moderately increased mainly for machinery equipment, etc.
  As for the international balance of payments, although export volume is picking up, the surplus in trade balance has been on a declining trend due to a moderate increase in import volume and an upward trend in the price of imports such as the sharp rise in crude oil prices. Meanwhile, the surplus in the goods and services account has decreased, 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. Although production of information-related producer goods are almost leveling off, inventory adjustments are in steady progress. Inventory levels remain low as a whole.

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

Corporate profits are improving. Firms' judgment on current business conditions is moderately recovering. The number of bankrupt companieswhich had been on a downtrends, has become flat recently.
  According to the BOJ tankan, both manufacturers and non-manufacturers expect an increase in sales for the third consecutive year in fiscal 2005 and increased ordinary income for the fourth consecutive year.

  The BOJ tankan survey also shows firms' judgment on current business conditions to be moderately recovering.

  The number of bankrupt companies has also been decreasing, but has become flat recently. In June, the number of corporate failures increased for the first time in 2 years and 10 months, but the level was low at approximately 1,200.

The employment situation is improving on a broader basis, though some severe aspects remain.
  Although the total unemployment rate is at a high level, it is on a downward trend, and wages have been increasing moderately.
  The number of new job offers has been increasing. The effective ratio of job offers to applicants has been rising. The number of employees has been on an upward trend. Overtime hours worked in the manufacturing industry have been flat.
  As for movement on wages, contractual cash earnings have been increasing moderately due to an increase in full-time workers accompanying improvements in the labor market. The total special cash earnings for June, including bonuses, increased from a year earlier.

3. Prices and the financial market

Domestic corporate goods priceshave been rising due to increased material prices.Consumer prices have been flat.
  Domestic corporate goods prices have been rising. Consumer prices have been flat month to month. However, consumer prices continued to show a slight declining trend year-on-year. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.

Stock prices have been rising to over 11,900 yen (the Nikkei average). The yen against the U.S. dollar has been around 112 yen recently.