Monthly Economic Report (April 2007)

Assessment of the current state of the Japanese economy

  The economy is recovering, despite weakness in industrial production in some sectors.
  As for short-term prospects, the economic recovery is expected to continue supported by the domestic private demand as high corporate profits 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

  In accordance with 'Direction and Strategy for the Japanese Economy', the Government will pursue acceleration and deepening of reforms for realization of "New Growth Economy". Following the approval by the Diet of the FY2007 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 trend of price stability and ensure the sustainable economic growth led by private-sector 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 showing a pick up.
  Private consumption is showing a pick up. Although consumer confidence and income are 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 February for the second consecutive month, thus showing signs of recovery.

  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 both the manufacturing and non-manufacturing industries increased in the October-December quarter of 2006.

  According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment for large manufacturers and large non-manufacturers in fiscal 2007 is expected to increase for the fifth and third consecutive year, respectively. In addition, corporations' sense of excess capacity, which indicates future business investment, has been on an improving trend.

  As for short-term prospects, business investment is expected to remain on an increasing trend, as corporate profits have continued to improve.

Housing constructionhas been generally flat.
  Housing construction has been generally flat. Construction of owned houses and houses for sale has been generally flat, although construction of houses for rent has been decreasing slightly of late.

  Housing starts are expected to move steadily as long as income environments in households continue to recover along with improvement in the employment situation.

Public investment has been generally sluggish.
  Public investment has been generally sluggish.

  Public investment in the January-March quarter of 2007 is considered to have been on a decreasing trend due to the fact that the contracted amount of public works in January and February decreased from the previous year.

Exports have been flat.Imports have been flat. The surplus in the trade and services balance is increasing.
  Exports have been flat. By region, exports to Asia have remained flat. Exports to the US have been flat as a whole, with exports of general machinery decreasing. Exports to the EU have been decreasing moderately. For short-term prospects, close monitoring is required for the future movement of the US economy.

  Imports have been flat. By region, imports from Asia remained flat. Imports from the US remained flat. Imports from the EU remained flat as a whole, with imports of machinery equipment decreasing.

  As for the international balance of payments, the surplus in trade balance has increased as export value increased and import value remained flat. The deficit in the services account has remained flat. Due to this, the surplus in the trade and services balance has increased.

2. Corporate activities and employment

Production flattened recently.
  Industrial production flattened recently, reflecting the rebound of strong growth in the production of transport equipment, etc. at the end of last year as well as a decline in the production of information-related producer goods, 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 almost flat. 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 8.3% in the fourth quarter of 2006, a gain for 18 consecutive quarters, reflecting increased sales.According to the BOJ tankan, fiscal 2007 sales are expected to post an increase for the fifth consecutive year, and fiscal 2007 current profits are expected to post an increase for the sixth consecutive year.

  The BOJ tankan survey shows that firms' judgment on current business conditions is generally flat. Large manufacturers' judgment on current business conditions worsened for the first time in four quarters, as judgment by such industries as chemicals and iron & steel improved, while judgment by such industries as electrical machinery and motor vehicles worsened. Large non-manufacturer's judgment flattened.

  The number of bankrupt companies has remained almost flat. The number of corporate failures was approximately 1,200 in March, 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.

  The number of new job offers has been moderately decreasing recently. The effective ratio of job offers to applicants has been on a downward trend. The number of employees has been increasing. Overtime hours worked in the manufacturing industry decreased. According to the BOJ tankan, diffusion index of employment conditions by all industry and all enterprises declined 1 percentage point in March, indicating a labor shortage.

  As for the movement of wages, contractual cash earnings have been moving horizontally. Total cash earnings have been moving in a weak tone.

3. Prices and the financial market

Domestic corporate goods prices and Consumer prices have been flat.
  Domestic corporate goods prices have been flat.

  Consumer prices have been flat.

  The rate of year-on-year change in consumer prices 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 from the 16,700 yen (Nikkei Stock Average) level to the 17,500 yen level. Long-term interest rates have been moving at the high 1.6% level after dropping to the mid 1.5% level.