Monthly Economic Report (July 2005)

Assessment of the current state of the Japanese economy

  The economy is recovering at a moderate pace, while some signs are seen of coming out of a weak situation.
  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 and the household sector is also improving. 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

  The Government made a cabinet decision on the "Basic Policies for Economic and Fiscal Management and Structural Reform 2005" on June 21. Acceleration and expansion of structural reforms will hereafter be pursued based on the Basic Policies.

  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 picking up.
  Private consumption is picking up ,reflecting a recovery of income and an improvement of consumer confidence. 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 May, but is increasing as a trend.

  As for short-term prospects, private consumption is expected to increase as improvement of the employment situation is leading 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 fell in May, but has generally been moderately increasing.

  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 moving sideways 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. However, there has been a temporary increase in orders for construction related to disaster-relief.

Exports and Imports have both been flat. The surplus in the trade and services balance is decreasing.
  Exports have been flat. By region, exports to Asia have remained flat as a whole, as exports of electrical equipment are weakening although exports of general machinery have been recovering. 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 moderately increase with the steady recovery in the world economy.
  Imports have remained flat as a whole as mineral fuels, etc. increased, while chemical products, etc. decreased. By region, imports from Asia remained flat as foods, etc. decreased while there were increases in metals and metal products, etc.. Imports from the US have been flat, with imports of foods, etc. increasing and imports of chemical products, etc. decreasing. Imports from the EU have been flat, with imports of machinery equipment, etc. increasing and imports of foods, etc. decreasing.
  As for the international balance of payments, although export volume and import volume have both been flat, increases in the price of imports such as the sharp rise in crude oil prices have led to a decreased surplus in the trade balance. 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. Information-related producer goods are almost leveling off. Inventory levels remain low as a whole. Inventory adjustments for information-related producer goods moderately progressed, while there were increases in some areas such as chemicals.

  As for short-term prospects, industrial production is expected to pick up with progress of inventory adjustment 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 companiesis decreasing.
  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 is decreasing. The number of corporate failures was less than 1,100, which is the lowest level since 1991 for May.

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 flat. 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 moderately decreasing. Diffusion index in employment condition showed the sense of a surplus dissipated, and there was no shortage or surplus in June.
  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.

3. Prices and the financial market

Domestic corporate goods prices have been rising recently due to increased material prices.Consumer prices have been flat.
  Domestic corporate goods prices have been rising recently. 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.

Long-term interest rates have been moving in the range 1.1% to 1.2% levels. The yen against the U.S. dollar has been moving in the direction of depreciation from the 108-yen level to the 112-yen level.