Monthly Economic Report (Feburuary 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." The Government made a cabinet decision on January 21 of "Economic Outlook for FY 2005 and Basic Economic and Fiscal Management Measures" and "Structural Reform and Medium-Term Economic and Fiscal Perspective - FY2004 Revision" and submitted the draft budget for FY2005 to the Diet.

  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

  Real GDP (gross domestic product) in the fourth quarter of 2004 decreased 0.1% (at an annual rate of 0.5%) from the previous quarter, despite the positive growth of Private Non-Residential Investment, mainly because of the negative growth of Private Final Consumption Expenditure and Net Exports (exports minus imports) of goods and services. Nominal GDP remained unchanged from the previous quarter.

Private consumption is almost flat.
  Private consumption is almost flat partly due to the temporary effects of temperatures which remained relatively high. Income is moving steadily and 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.), has remained roughly flat of late.
  Among individual economic indicators for December, the Family Income and Expenditure Survey shows that real consumption expenditure decreased from the previous month. With regard to sales indicators, retail sales, which decreased from the previous month, have remained generally flat on average. Department store sales and chain store sales decreased from a year earlier due mainly to sluggish sales of seasonal clothing as temperatures had stayed high till the middle of December. Home appliance sales were at the same level as a year earlier due mainly to continued brisk sales of DVD recorders and LCD/PDP TVs, despite sluggish sales of personal computers and heating appliances. New car sales increased from the previous month as sales of new models were brisk. Both overseas and domestic travels decreased from a year earlier. Eating out increased from a year earlier.
  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.
  Business investment is increasing thanks to an improvement of corporate profits and increases in demand. Shipment of capital goods, which is a supply-side indicator of machinery equipment investment, is increasing. Software investment is moderately increasing. The Synthetic Business Investment Index, which synthesizes these statistics, has been picking up.
  According to the Bank of Japan short-term business sentiment survey (tankan), business investment in fiscal 2004 is planned to increase for two years on end and the increase rates have been the highest since 1989 for large manufacturers, and since 1990 for smaller manufacturers, for the survey in September. And corporations' sense of excess capacity, which indicates future business investment, has remained flat. As for leading indicators, machinery orders began to pick up as the manufacturing industry has increased for two consecutive months. Construction work planned have roughly remained flat. Business investment is expected to remain on an increasing trend, as corporate profits have been continuing their improvement.

Housing constructionhas remained roughly flat.
  Housing construction has remained roughly flat. This is because construction of houses for rent and houses for sale moved steadily, although construction of owned houses has been decreasing slightly of late. In December, housing construction increased 2.9% from the previous month to an annual rate of 1.185 million units. Total floor space generally followed the same movement. Incidentally, housing construction in 2004 increased 2.5% from the preceding year to 1.189 million units, a positive growth for two consecutive years, due to increase in houses for rent and houses for sale, although construction of owned houses slightly decreased. 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.
  Public investment has been generally sluggish. However, the effects of the supplementary budget are expected to be seen towards the end of the fiscal year.
  In the national budget for FY2004, public investment-related expense increased, after the addition of the supplementary budget, 8.2 % from the previous year. The Government had initially slashed public investment-related expenses by 3.3 % from the previous year, but in the supplementary budget, which was approved on February 1, 2005, the Government took budgetary measures including additional public works projects of 1.2 trillion yen, which consists of national disaster restoration expenses and other. 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.
  Public works orders, the public works contract value, and orders received by 50 major companies in the October - December quarter of 2004 decreased from a year earlier, as they did in the previous quarter.
  Public investment in the January - March quarter of 2005 is considered to have been on a decreasing trend, as the contracted amount of public works in January decreased from a year earlier. But its temporary rise can be seen towards the end of the fiscal year by the effects of the supplementary budget.

Exports have been weakening. Imports are moving sideways. The surplus in the trade and services balance has been flat..
  Exports have been weakening. By region, exports to Asia as a whole have remained flat, as electrical machinery & equipment is moving sideways. Exports to the U.S. as a whole have remained flat, as transportation equipment and general machinery are moving steadily while electrical machinery & equipment is weakening. Exports to the EU have been slightly decreasing. As for the outlook for exports, attention needs to be paid to the movement of exchange rates, although exports are expected to increase moderately in line with the steady recovery in the world economy.
  Imports are moving sideways. By region, imports from Asia have remained flat, as mineral fuels and Textiles decreased while machinery equipment increased. Imports from the U.S. have remained flat as machinery equipment, etc. decreased, while chemical goods, etc increased. Imports from the EU, as a whole have remained flat, although machinery equipment increased.
  As for the international balance of payments, the surplus in trade balance has remained almost flat, as exports in volume have been declining somewhat and imports have become flat. On the other hand, the surplus in the goods and services account has become roughly flat, as the deficit in the services account has been moving sideways.

2. Corporate activities and employment

Industrial production has been weakening somewhat.
  Industrial production is weakening somewhat, as production adjustment movement of information-related producer goods has been accelerated and exports have been weakening recently. Inventory remains at a low level as a whole, but that of information-related producer goods is on an increasing trend.
  As for the prospects of industrial production, the recovery is expected to be slowed as production adjustment movement of information-related producer goods continues, although the world economy has been recovering steadily. The Survey of Production Forecasts indicates that industrial production is expected to increase in January and decrease in February.
  Tertiary industry activities are increasing moderately.

Corporate profits are improving sharply. Firms' judgment on current business conditions observes a slower improvement. The number of bankrupt companiesis decreasing.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits in the July-September quarter of 2004 have posted a year-to-year increase of 37.8%, which is the highest growth rate since the April - June quarter of 2000, as sales are increasing, which has been continuing for nine consecutive quarters. Among industries, profits of the manufacturing industry increased 35.6%, and profits of the non-manufacturing industry increased 39.3%. According to the BOJ tankan survey, both manufactures and non-manufactures are planning an increase in profit for three consecutive years in fiscal 2004. They upgraded the profit projection in the first half of the fiscal year, but downgraded it in the second half.
  The BOJ tankan survey also shows that improvement of business sentiment comes to a halt. The diffusion index in large manufacturing industry remains at a high level, although it decreased from a month earlier for the first time in 7 quarters.
  The number of bankrupt companies is decreasing. The number of corporate failures was less than 1,100, which is the lowest level since 1995 for January.

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 December declined 0.1 percentage points from the previous month to 4.4%. The number of unemployed persons decreased, and the number of employed persons increased. 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 has been on an increasing trend. The effective ratio of job offers to applicants has been rising. The number of employees has been flattening of late. Overtime hours worked in the manufacturing industry have been weakening.
  As for movement on wages, contractual cash earnings have been weakening as overtime earnings are decelerating recently. The total special cash earnings from November to December, including bonuses, increased from a year earlier.

3. Prices and the financial market

Domestic corporate goods prices and Consumer prices are both moving sideways.
  Domestic corporate goods prices, which had been on an upward trend, have become flat recently. Breaking down the recent trend by type of goods, price of electrical machinery & equipment decreased and price of petroleum products, which had contributed to a rise in Domestic corporate goods prices, decreased, while prices of iron & steel increased. Import prices (yen basis) have been declining, reflecting the softening of crude oil markets and the appreciation of the yen.
  Corporate services prices have remained slightly below the levels of the previous year.
  Consumer prices are moving sideways. Prices of general commodities have remained generally flat, while the rise in prices of petroleum products came to a halt and prices of rice declined. General services prices and public utility charges remained generally flat.
  Consumer prices remain on a slightly declining trend compared with the previous year. Taken together, these movements show that the Japanese economy is in a mild deflationary phase.

The yen against the U.S. dollar has been recently moving around 105 yen depreciating from the 102-yen level. Long-term interest rates have been moving at the 1.4% level after declining to the 1.2% level.
  Stock prices, after declining reflecting the fall of the U.S. stock prices, have been rising to around 11,600 yen (the Nikkei average). The yen against the U.S. dollar has been recently moving around 105 yen depreciating from the 102-yen level due mainly to diminishing concerns about the U.S. current account and fiscal deficits and increasing expectation of a future rise of interest rates in the U.S. .
  Short-term interest rates are stable. Long-term interest rates have been moving at the 1.4% level against the background of the rise in stock prices, etc., after declining to the 1.2% level reflecting uncertain outlook for the economy and more positive stance on investment in government bonds by financial institutions. Enterprises' financial conditions have generally improved, and the yield spread between corporate and government bonds has remained at a low level.
  The growth of the monetary base is easing. The growth rate of the M2+CD money supply has moved sideways since September last year.

4. Overseas economies

The world economy has been recovering steadily.

In the United States, the economy is expanding.
  GDP in the October- December quarter grew at an annual rate of 3.1% from the previous quarter, due mainly to an annual rate of 4.6% and 10.3% rise in private consumption and business investment, respectively. As a result, the U.S. economy grew at a high growth rate of 4.4% for the whole of 2004.
  It is forecast to grow at around 3.5%, which is higher than its potential growth rate, as this trend of expansion is expected to continue.
  According to the Budget Message announced in early February, the U.S. budget deficit in the fiscal year 2005 is expected to come to 426.6 billion dollars, the highest previous level. But the government has also announced it plans to cut the deficit in half over the next five years by the fiscal year 2009.

Asia has seen continued economic expansion in China and Thailand.
  In China, the economy has been expanding as investment in fixed assets continued to increase, although its growth is declining. In Thailand economic expansion continues led by consumption and investment. In Malaysia and Singapore, the economies are expanding due to increases in consumption. In Taiwan, the economy is expanding. In South Korea, some weak movements can be seen in export and production, although the economy continues to recover.

The Euro area economy is recovering moderately, and the U.K. economy has been recovering steadily.
  In the Euro area, the economy is recovering moderately. In Germany, the economy is recovering at a moderate pace. In France, the economy has been recovering as consumption has been on an increasing trend.
  In the U.K., the economy has been recovering steadily, with exports continuing to increase moderately.

International financial situations
  As for the international financial situations, stock markets in the world have been rising since the end of January. Long-term interest rates in major countries have remained flat. The U.S. dollar appreciated against major currencies in early February.
  Oil prices are moving around the late 40-dollar level, after rising in January.