Monthly Economic Report (March 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."

  On March 9, the Bank of Japan (BOJ) decided to end the quantitative easing policy, to change the operating target of money market operations from the outstanding balance of current accounts at BOJ to uncollateralized overnight call rate, and to encourage it to remain at effectively zero percent. BOJ also clarified its thinking on price stability in "The Introduction of a New Framework for the Conduct of Monetary Policy" decided on the same day.

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

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 January, but is moderately increasing as a 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 short-term business sentiment survey (tankan), planned business investment in fiscal 2005 is showing an increase for the third consecutive year, with a double-digit increase rate 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 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 moderately.Imports have been flat. The surplus in the trade and services balance is increasing.
  Exports are increasing moderately. 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 are moderately increasing, with exports of transportation equipment and general machinery increasing. Exports to the EU as a whole have been flat, although transportation equipment increased. For short-term prospects, exports are expected to increase with the steady recovery in the world economy.

  Imports as a whole have remained flat, although machinery equipment, etc. increased. By region, imports from Asia, the US and the EU have been flat.

  As for the international balance of payments, the surplus in trade balance has been increasing with export volume increasing moderately and import volume remaining flat. The deficit in the services account has been flat. Because of this, the surplus in the trade and services balance is increasing.

2. Corporate activities and employment

Production is increasing moderately.
  Industrial production is increasing moderately as a whole, backed by a moderate increase in exports and an increase in 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. The number of bankrupt companieshas been almost flat.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, a year-to-year increase of 11.1% was posted for corporate profits in the October-December quarter of 2005, which has been continuing for 14 consecutive quarters, reflecting increased sales in a wide range of industries such as transportation equipment, electrical machinery, wholesaling and retailing industries etc. 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 been almost flat. The number of corporate failures was approximately 1,000 in January, marking a year-over-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 on an upward trend. Overtime hours worked in the manufacturing industry have been on an increasing trend. The proportion of business establishments that implemented employment adjustment such as "overtime restrictions" decreased.

  As for 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. were a factor in boosting them. Taken together, these movements show some improvement, but the Japanese economy is in a mild deflationary phase.

The yen against the U.S. dollar moved in the direction of appreciation to the 115-yen level before moving in the direction of depreciation to the 118-yen level. Long-term interest rates have increased from the low 1.5% level to the low 1.6% level.