Monthly Economic Report (October 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, 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 an improvement of consumer confidence and moderate increase of income. 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 August.

  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. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side indicator of business investment, shows that business investment among non-manufacturers posted a decrease in the April - June quarter of 2005 from the previous quarter but it has increased for four consecutive quarters among manufacturers.

  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 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 constructionhas been increasing recently.
  Housing construction has been increasing recently. 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 are increasing moderately. The surplus in the trade and services balance is decreasing.
  Exports are picking up. By region, exports to Asia have been recovering as a whole as exports of general machinery and electrical equipment have been recovering. Exports to the US have been flat, with exports of transportation equipment remaining flat. Exports to the EU have been flat, with exports of electrical equipment moving steadily. For short-term prospects, exports are expected to increase with the steady recovery in the world economy.
  Imports have been increasing moderately, especially for machinery equipment, etc. By region, imports from Asia have moderately increased mainly for machinery equipment, etc. Imports from the US have moderately increased mainly for chemical goods, etc. Imports from the EU have been flat, with imports of machinery equipment, etc. increasing and imports of chemical products, etc. decreasing.
  As for the international balance of payments, although export volume is picking up, the surplus in trade balance has been declining due to a moderate increase in import volume and an upward trend in the price of imports such as the sharp rise in crude oil prices. 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 with increases in information-related producer goods, although weak movements have been seen in some areas. Inventory levels remain low as a whole, while increases have been seen in some areas such as iron and steel, etc.

  As for short-term prospects, industrial production is expected to pick up with a continued increase in production 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 iproving. The number of bankrupt companieswhich had been on a downtrends, has become flat recently.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, a year-to-year increase of 12.9% was posted for corporate profits in the April-June quarter of 2005, which has been continuing for 12 consecutive quarters, reflecting increased sales in a wide range of industries.

  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 also been decreasing, but has become flat recently. The number of corporate failures was in the mid 1,100s in August, marking a year-over-year increase for the first time in 2 months, 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 increasing. 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 on wages, contractual cash earnings have been increasing moderately. The total special cash earnings from June to August, including bonuses, increased from a year earlier.

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.

  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 rose to over 13,700 yen (the Nikkei average) before falling to a level above 13,200 yen. Long-term interest rates are currently around 1.5%.