Monthly Economic Report (June 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 intends to decide the "Basic Policies for Economic and Fiscal Management and Structural Reform 2005" (tentative name) around late June in order to initiate "the proactive reform" in the concentrated consolidation period based on the fruits of reforms to date.

  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 picking up.
  Private consumption is picking up. Behind this, there are the facts that income shows a recovery 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.) increased in April.

  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 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. 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. This is because construction of houses for rent and construction of houses for sale moved steadily, although construction of owned houses has been decreasing slightly. 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 as a whole have been weakening, as exports of general machinery are weakening although exports of electrical equipment have remained 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 moderately increase with the steady recovery in the world economy.
  Imports have remained flat as a whole as machinery equipment, etc. increased, while mineral fuels, etc. decreased. By region, imports from Asia have moderately increased mainly for machinery equipment. Imports from the US have been flat, with imports of machinery equipment increasing while imports of food and chemical products decreased. Imports from the EU have moderately decreased mainly for chemical products.
  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 progressed, while there were increases in some areas such as transportation equipment and general machinery.

  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 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 15.8% was posted for corporate profits in the January-March quarter of 2005, which has been continuing for 11 consecutive quarters, reflecting increased sales in a wide range of industries such as general machinery and wholesaling. According to the BOJ tankan, both manufacturers 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 1,000, marking the lowest level for April since 1991.

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 the wages has 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 has been increasing moderately. Overtime hours worked in the manufacturing industry have been flat.
  As for movement on wages contractual cash earnings has 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 on 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 around 11,300 yen (Nikkei Stock Average). Long-term interest rates are currently around 1.2%.