Monthly Economic Report (March 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." While implementing structural reform, the Government will make efforts in order to seek an early approval by the Diet of the FY2005 budget and related legislation.

  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

Private consumption is almost flat.
  Private consumption is almost flat. 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, judged by the face that an increase in January mainly reflected a rebound in spending on winter-related products, which, had been depressed by the effects of temperatures that had remained relatively high until December.
  Among individual economic indicators for January, the Family Income and Expenditure Survey shows that real consumption expenditure increased sharply from the previous month due mainly to the recovery of sales of seasonal clothing as temperatures came back to the level of an average year. With regard to sales indicators, retail sales increased sharply from the previous month thanks to good performance of the first sale of the new year and sales campaigns at department stores. Home appliance sales increased from a year earlier due mainly to continued brisk sales of DVD recorders and LCD/PDP TVs. New car sales decreased in February from the previous month after posting a month-to-month increase in January. Overseas travel increased from a year earlier, although domestic travel 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 moderately.
  Business investment is increasing moderately thanks to an improvement of corporate profits. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side indicator of business investment, shows that business investment in non-manufacturers, mainly of real estate and services, decreased in the October - December quarter of 2004 from the previous quarter and it has increased for two consecutive quarters in manufacturers. 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 the demand-side statistics and the supply-side statistics, has been moderately 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. And corporations' sense of excess capacity, which indicates future business investment, has remained flat. As for leading indicators, machinery orders, which began to pick up, decreased in January especially in the manufacturing industry. 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 been increasing recently.
  Housing construction has been increasing recently. This is because construction of houses for rent increased and construction of houses for sale moved steadily, although construction of owned houses has been decreasing slightly of late. In January, housing construction increased 9.9% from the previous month to an annual rate of 1.302 million units. Total floor space generally followed the same movement. 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 is planned to increase, 8.2 % from the previous year after the adoption of the supplementary budget. 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, etc. 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, although general machinery shows sign of picking up. 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 have remained flat as a whole as mineral fuels, etc. decreased, while metal products, etc. increased. By region, imports from Asia, mainly of machinery equipment and metal products, have slightly increased. Imports from the U.S., mainly of foods and raw materials, have slightly increased. Imports from EU, as a whole have remained flat as machinery equipment, etc. decreased, while metal products, etc. 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 flat, as the deficit in the services account has been moving sideways.

2. Corporate activities and employment

Production is leveling off.
  Industrial production is leveling off, reflecting resumption of capital goods and progress of production adjustment of information-related producer goods. Inventory remains at a low level as a whole.
  As for short-term prospects, industrial production is expected to pick up with progress of production adjustment of information-related producer goods, as the world economy has been recovering steadily. The Survey of Production Forecasts indicates industrial production is expected to decrease both in February and March.
  Tertiary industry activities are increasing moderately.

Corporate profits are improving. 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 October-December quarter of 2004 have posted a year-to-year increase of 17.6%, which has been continuing for 10 consecutive quarters, although the growth rate has slowed compared to the previous quarter, reflecting production adjustment movement of IT-related goods. Among industries, profits of the manufacturing industry increased 25.3%, and profits of the non-manufacturing industry increased 12.4%. 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 1992 for February.

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 January remained the same level as the previous month of 4.5%. The number of unemployed persons increased, but 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 on an increasing trend. The number of employees, which has been flattening of late, increased in January. Overtime hours worked in the manufacturing industry have been flat. The proportion of business establishments that implemented employment adjustment, such as "overtime restrictions," has remained flat at a low level.
  As for movement on wages, contractual cash earnings has remained flat.

3. Prices and the financial market

Domestic corporate goods prices have become flat Consumer prices have been slightly declining recently.
  Domestic corporate goods prices have become flat. Breaking down the recent trend by type of goods, prices of petroleum products and chemicals & related products have been rising, reflecting a rise in crude oil prices from the beginning of the year, while electrical machinery & equipment declined. Import prices (yen basis) have been rising, reflecting a rise in the international commodity market, such as crude oil price.
  Corporate services prices have been decreasing at a faster pace than a year earlier due mainly to a decline in ocean tanker.
  Consumer prices have been slightly declining recently due mainly to the effects of the fall of public utility charges. Prices of general commodities and general services have remained generally flat. Public utility charges decreased at a faster pace due to declining of telephone charges and electricity charges.
  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.

Stock prices have been rising to around 11,900 yen (the Nikkei average). Long-term interest rates have been recently rising to around 1.5% after moving at the low 1.4% level.
  Stock prices have been rising to around 11,900 yen (the Nikkei average), reflecting the rise in the U.S. stock prices and increasing expectation of domestic economic recovery, etc. The yen against the U.S. dollar is seesawing in the range of 103-yen level and 105-yen level as expectation of a future rise of interest rates in the U.S has been persistently high, while there have been dollar-selling movements reflecting the steep rise in commodity prices such as the WTI prices and some economic indicators of Japan turned out to be better than expected in the market.
  Short-term interest rates have been stable. Long-term interest rates have been recently rising to around 1.5% against the background of the rise in stock prices, etc. after moving at the low 1.4% level. 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 has been easing as the upward factors caused by the increase in the target range for Current Account Balances of the BOJ in January last year have disappeared. 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 3.8% from the previous quarter, due mainly to an annual rate of 4.2% and 14.0% rise in private consumption and business investment, respectively.
  The unemployment rate in February was 5.4%, but consumer confidence in employment is improving as nonfarm payroll employment increased by around 260,000, which is more than monthly average of 180,000 in 2004.

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, the economy continues recovering, although exports are decelerating.

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 as a recovery of internal demand is delayed as private consumption has continued to be weak. The French economy has been recovering, with consumption and investment increasing.
  In the U.K., the economy has been recovering steadily, as consumption continues to increase moderately and exports increases.

International financial situations
  As for the international financial situations, stock markets in the world have generally remained on a rising trend. Long-term interest rates in major countries have remained on a rising trend. The U.S. dollar against major currencies is moving sideways.
  Oil prices have been moving at the lower 50-dollar level, after rising above 50-dollar at the end of February.