Monthly Economic Report (December 2005)

Assessment of the current state of the Japanese economy

  The economy is recovering at a moderate pace.
  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 made a cabinet decision on December 6 of the "Basic Principles of FY2006 Budget Formulation."

  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 a moderate increase of income. Consumer confidence is almost flat. 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 October.

  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.
  Business investment is increasing thanks to an improvement of corporate profits and increases in demand.

  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-digit for manufacturers for the second consecutive year, and the highest levels of growth since 1991 for non-manufacturers. Business investment is expected to remain on an increasing trend, as corporate profits have been continuing to improve.

Housing construction is increasing.
  Housing construction is increasing. This is because construction of houses for rent and construction of houses for sale increased, although construction of owned houses has been generally flat. Housing starts are expected to move steadily if the income environments in households continue to 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 have been flat. The surplus in the trade and services balance has been flat.
  Exports are picking up. By region, exports to Asia have been recovering as a whole as exports of electrical equipment have been recovering. Exports to the US have been flat, with exports of general machinery and electrical equipment moving steadily. Exports to the EU have been flat. For short-term prospects, exports are expected to increase with the steady recovery in the world economy.
  Imports as a whole have remained flat, although machinery equipment, etc. increased. By region, imports from Asia have remained flat as machinery equipment, etc. increased, while mineral fuels, etc. decreased. Imports from the US have been flat. Imports from the EU have been flat.
  As for the international balance of payments, although there has been an upward trend in the price of imports such as the sharp rise in crude oil prices, the surplus in trade balance has been flat with export volume picking up and import volume remaining flat. The deficit in the services account has decreased slightly. Because of this, the surplus in the trade and services balance has been flat.

2. Corporate activities and employment

Production is picking up.
  Industrial production is picking up as a whole, backed by recovery in exports and an increase in business investment, despite inventory adjustments seen in some areas.

  As for short-term prospects, industrial production is expected to continue recovering, reflecting the increase in business investment and the steady recovery of the world economy.

Corporate profits are improving. Firms' judgment on current business conditions is moderately improving. The number of bankrupt companieshas been almost flat.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, a year-to-year increase of 6.6% was posted for corporate profits in the July-September quarter of 2005, which has been continuing for 13 consecutive quarters, reflecting increased sales in a wide range of industries such as steel and transportation equipment.

  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 improving.

  The number of bankrupt companies has been almost flat. The number of corporate failures was approximately 1,100 in November, marking a year-over-year increase, but remaining at a low level.

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 on an increasing trend. The effective ratio of job offers to applicants has been in an upward trend. The number of employees is increasing. Overtime hours worked in the manufacturing industry have been flat.
  As for movement of wages, contractual cash earnings have been increasing moderately.

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.

  Consumer prices changed 0.0% year-on-year in October, but petroleum products, etc. were a factor in boosting them. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.

Stock prices rose to over 15,700 yen (the Nikkei average) before falling to a level of 15,200 yen. The yen against the U.S. dollar has been moving in the direction of appreciation toward the 117-yen level after moving in the direction of depreciation to the 121-yen level.