Monthly Economic Report (August 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

  Acceleration and deepening of reforms will hereafter be pursued based on the 'Economic and Fiscal Reform 2007'.
  In order to ensure the sustainable economic growth led by private-sector as well as establish the stability of the level of inflation, the Government and the Bank of Japan will implement the policy management, sharing their basic perspectives on macroeconomic management which are shown on the Basic Policies.

Detailed explanations

1.Demand trends such as consumption and investment

Private consumption is picking up.
  Private consumption is picking up. Consumer confidence is weakening while income is moving steady. 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 May in comparison with the previous month, thus is picking up.

  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.

  According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment for businesses of all sizes in all industries is expected to increase in fiscal 2007 for the fifth consecutive year, with a two-digit increase predicted for large manufacturers for the fourth consecutive year and an increase for large non-manufacturers anticipated for the third consecutive year.

  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 houses for sale has been increasing, although construction of owned houses has been decreasing moderately and construction of houses for rent has been in a weak tone. 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.

  In terms of public investment in the April-June quarter of 2007, the contracted amount of public works was lower than in the previous year.

Exports have been gradually increasing.Imports have been gradually decreasing. The surplus in the trade and services balance is increasing.
  Exports have been gradually increasing. By region, exports to Asia have increased as a whole, with exports of general machinery increasing. Exports to the U.S. have been decreasing. Exports to the EU have increased gradually as a whole, with exports of general machinery and transportation equipment increasing. As for short-term prospects, future movement of the U.S. economy should be closely monitored.

  Imports have been gradually decreasing. By region, imports from Asia have been decreasing gradually as a whole, with imports of machinery equipment decreasing. Imports from both the U.S. and EU have been flat.

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

2. Corporate activities and employment

Production has been flat.
  Industrial production has been flat due to horizontal movement in the production of transport equipment, information-related producer goods,etc.

  As for short-term prospects, industrial production is expected 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 has been flat. The number of bankrupt companiesremains almost flat.
  According to the BOJtankan, fiscal 2007 sales are expected to post an increase for the fifth consecutive year while current profit is expected to remain unchanged from the previous year.

  The BOJ tankan shows that firms' judgment on current business conditions has been flat.

  The number of bankrupt companies has remained almost flat. Although the number of corporate failures was 1,185 in June, which is a year-on-year increase of 6.6%, the aggregate amount of indebtedness decreased year-on-year by 17.2% to 315.2 billion yen.

The employment situation is improving steadily, though some severe aspects remain.
  The employment situation is improving steadily, though some severe aspects remain. The total unemployment rate is on a downward trend and has reached the upper 3% level.

  The number of new job offers has been moderately decreasing. The effective ratio of job offers to applicants has been rising recently. The number of employees is increasing. Overtime hours worked in the manufacturing industry are decreasing.

  As for the movement of wages, contractual cash earnings have been moving horizontally. The total amount of cash earnings has been moving in a weak tone.

3. Prices and the financial market

Domestic corporate goods prices have 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 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.

As for stock prices, after rising to the 18,100 yen level, the Nikkei Stock Avarage dropped to the 16,800 yen level and is thereafter moving at the 16,900 yen level. Long-term interest rates dropped from the low 1.9% level to the high 1.7% level.