Monthly Economic ReportExecutive Summary( Decemmber 2006 )
Assessment of the current state of the Japanese economy
The economy is recovering, despite some weakness in consumption.
- Corporate profits are improving and business investment is increasing.
- The employment situation is improving on a broader basis, though some severe aspects remain.
- Private consumption is almost flat.
- Exports have been flat and industrial production is increasing moderately.
As for short-term prospects, the economic recovery is expected to continue supported by the domestic private demand as high corporate profits currently observed feed 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 deepening of structural reforms will be pursued based on "Basic Policies for Economic and Fiscal Management and Structural Reform 2006." The Government made a cabinet decision on December 1 of the "Basic Principles of FY 2007 Budget Formulation." Furthermore, the Government made a cabinet approval on December 19 of the " Fiscal 2007 Economic Outlook and Basic Stance for Economic and Fiscal Management" and made a cabinet decision on December 24 of the "Budget for FY2007 (estimate)."
In order to secure the trend of price stability during the "Concentrated Consolidation Period" and ensure the sustainable economic growth led by private-sector demand under price stability, the Government and the Bank of Japan will make joint efforts, sharing their basic perspectives on macroeconomic management.
Detailed explanations
1.Demand trends such as consumption and investment
Private consumption is almost flat.
Private consumption is almost flat, reflecting decelerating income, with consumer confidence moving horizontally. 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 October from the previous month, but has remained almost flat.
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.
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 statistic, shows that business investment by the non-manufacturing industries increased in the July-September quarter of 2006, and business investment by the manufacturing industry decreased during the same quarter.
According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment in fiscal 2006 is expected to increase for the fourth consecutive year, with manufacturers expected to post a double-digit increase for the third consecutive year, and non-manufacturers expected to post an increase for the fourth consecutive year. As well, corporations' sense of excess capacity, which indicates future business investment, has been on an improving trend. Business investment is expected to remain on an increasing trend, as corporate profits have continued to improve.
Housing construction has been increasing recently.
Housing construction has been increasing recently. Construction of owned houses and construction of houses for sale has been increasing, although construction of houses for rent has been generally flat. Housing starts are expected to move steadily as long as 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.
Public investment in the October-December quarter of 2006 is likely to continue to decrease from the previous year, as the contracted amount of public works in October and November decreased from a year earlier and in view of the budget situations of the national and local governments.
Exports have been flat.Imports have been flat. The surplus in the trade and services balance has been flat.
Exports have been flat. By region, exports to Asia have been flat as a whole, with exports of iron & steel, etc. increasing, and exports of electrical equipment decreasing. Exports to the US have remained flat. Exports to the EU have been decreasing moderately as a whole as exports of general machinery have decreased. For short-term prospects, close monitoring is required for the future movement of the U.S. economy.
Imports have been flat. By region, imports from Asia remained flat. Imports from the US increased as a whole as imports of machinery equipment have increased. Imports from the EU remained flat.
As for the international balance of payments, the surplus in trade balance has remained flat, with both import volume and export volume remaining flat. The deficit in the services account has remained flat. Due to this, the surplus in the trade and services balance has remained flat.
2. Corporate activities and employment
Production is increasing moderately.
Industrial production is increasing moderately backed by an increase in business investment, etc.
As for short-term prospects, industrial production is expected to continue to increase moderately, reflecting the increase in business investment, etc. In addition, attention should be given to the future movement of inventory for information-related producer goods.
Corporate profits are improving. Firms' judgment on current business conditions is moderately improving. The number of bankrupt companiesremains almost flat.
According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits posted a year-on-year increase of 15.5% in the third quarter of 2006, a gain for 17 consecutive quarters, reflecting increased sales. 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. Large manufacturers' judgment on current business conditions improved for the third consecutive quarter, as judgment by such industries as chemicals and motor vehicles improved, although judgment by such industries as iron & steel and electrical machinery worsened. Large non-manufacturers' judgment improved for the first time in two quarters.
The number of bankrupt companies has remained almost flat. The number of corporate failures was approximately 1,100 in November, 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 moving horizontally. The effective ratio of job offers to applicants has been moving horizontally. The number of employees has been increasing. Overtime hours worked in the manufacturing industry have been increasing moderately.
As for the movement of wages, contractual cash earnings have been moving horizontally. The total cash earnings are increasing moderately on the whole.
3. Prices and the financial market
Domestic corporate goods priceshave been flat recently.Consumer prices have been flat.
Domestic corporate goods prices have been flat recently.
Consumer prices have been flat.
Although the year-on-year change in consumer prices has been positive, the rate of change has been in the neighborhood of zero percent if petroleum products and other special factors are excluded.
However, we need to keep a close watch on the impact of overseas economic movements on future price movements.
Stock prices rose to the 16,700 yen (Nikkei Stock Average) level from the 15,700 yen level. The yen against the U.S. dollar moved in the direction of depreciation to the 118-yen level, after moving in the direction of appreciation from the 116-yen level to the 114-yen level.