Monthly Economic Report (April 2006)

Assessment of the current state of the Japanese economy

  The economy is recovering.
  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." Following the approval by the Diet of the FY2006 budget and related legislation such as the tax reform bill, steady disbursement and implementation of these measures will be made.

  In order to secure the eradication of deflation during the "Concentrated Consolidation Period," the government and the Bank of Japan will make joint efforts.

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.) decreased in February, but is moderately increasing as a general trend.

  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.

  According to the Bank of Japan's short-term business sentiment survey (tankan), manufacturers' planned business investment for fiscal 2006 increased for the fourth consecutive year. Business investment is expected to remain on an increasing trend, as corporate profits have been continuing to improve.

Housing construction has been almost flat.
  Housing construction has been almost flat. Construction of houses for rent is increasing, but construction of owned houses and houses for sale 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 increasing.Imports are increasing moderately. The surplus in the trade and services balance has been flat.
  Exports are increasing. By region, exports to Asia have been increasing moderately as a whole as exports of electrical equipment and chemical products have been increasing. Exports to the US have been increasing as a whole, with exports of transportation equipment and electrical equipment increasing. Exports to the EU have been flat. For short-term prospects, exports are expected to increase along with the steady recovery of the world economy.

  Imports are increasing moderately, mainly in relation to machinery equipment. By region, imports from Asia have been increasing moderately, mainly with regards to machinery equipment. Imports from the US have been increasing moderately, with machinery equipment showing the largest impact. Imports from the EU have been flat.

  As for the international balance of payments, although export volume is increasing, the surplus in trade balance has been flat due to a moderate increase in import volume and a rising trend of import prices caused by higher crude oil prices. The deficit in the services account has been flat. Because of this, the surplus in the trade and services balance has been flat.

2. Corporate activities and employment

Production is increasing moderately.
  Industrial production is increasing moderately as a whole backed by increases in exports and business investment, despite inventory adjustments seen in some areas.]

  As for short-term prospects, industrial production is expected to continue increasing moderately, reflecting the increase in business investment and the steady recovery of the world economy.

Corporate profits are improving. Firms' judgment on current business conditions is moderately improving, although some sectors are coutious. The number of bankrupt companieshas been almost flat.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits posted a year-on-year increase of 11.1% in the October-December quarter of 2005, a gain for 14 consecutive quarters, reflecting increased sales in a wide range of industries such as transportation machinery, electrical machinery, wholesaling and retailing industries etc. According to the BOJ tankan, fiscal 2006 sales are expected to post an increase for the fourth consecutive year and fiscal 2006 current profits are expected to post an increase for the fifth consecutive year.

  The BOJ tankan survey also shows that firms' judgment on current business conditions is moderately improving, although some sectors are cautious.

  The number of bankrupt companies has remained almost flat. The number of corporate failures was approximately 1,000 in February, marking a year-on-year increase, but remaining at a low level.

The employment situation is improving on a broader basis, though some severe aspects remain.
  The employment situation is improving, 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 rising. The number of employees has been increasing. Overtime hours worked in the manufacturing industry have been on an increasing trend. Diffusion index of employment conditions by all industry and all enterprises declined 3 percentage points in March, indicating a tighter labor shortage.

  As for the movement of wages, contractual cash earnings have been increasing moderately.

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.

  The year-on-year change in consumer prices has been positive since last November, but petroleum products, etc. are a price-boosting factor. Taken as a whole, these movements show some improvement, but the Japanese economy is in a mild deflationary phase.

Stock prices fell to the 17,100 yen level (Nikkei Stock Average) after rising from the 16,000 yen level to the 17,500 yen level. Long-term interest rates have increased to the high 1.8% level after moving to around 1.7%.