Monthly Economic Report (July 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

  The Government made a cabinet decision on the 'Economic and Fiscal Reform 2007' on June 19, aiming an enhancement of the growth potential, the construction of the system of administration and finance in the 21st century, and the realization of sustainable and secure society. Acceleration and deepening of reforms will hereafter be pursued based on the Basic Policies.
  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. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side statistic, shows that business investment by both manufacturing and non-manufacturing industries increased in the January-March quarter of 2007.

  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: a two-digit increase predicted for large manufacturers for the fourth consecutive year and an increase for large non-manufacturers 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.

  Although public investment in the January-March quarter of 2007 appeared to be on course to exceed that of the previous year due to the contracted amount of public works etc., orders received for public works were lower than in the previous year.

  Public investment in the April-June quarter of 2007 is considered to have been on a decreasing trend as the contracted amount of public works in May etc. 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 is increasing.
  Exports have been flat. By region, exports to Asia have increased gradually as a whole, with exports of general machinery increasing. Exports to the U.S. have declined as a whole, with exports of transportation equipment 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 flat. By region, imports from Asia have declined gradually. Imports from the U.S. have been flat. Imports from the EU have been flat overall, with imports of machinery equipment increasing.

  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., which showed strong growth at the end of last year.

  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 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 7.4% in the first quarter of 2007, a gain for 19 consecutive quarters, reflecting increased sales. According to the BOJ tankan, 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. Despite deterioration in iron and steel, motor vehicles and other industries, improvement was seen in industrial machinery, shipbuilding and heavy machinery etc, thereby firms' judgment on current business conditions has become flat for both large manufacturers and large non-manufacturers.

  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 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. The effective ratio of job offers to applicants has been moving horizontally. The number of employees has been on an upword trend. Overtime hours worked in the manufacturing industry decreased. Although the BOJ tankan shows that firm's judgement on current employment conditions remains insufficient, the diffusion index of employment conditions by all industries and all enterprises increased 4 percentage points in June.

  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.

After rising to the 18,200 yen level (Nikkei Stock Average)level, stock prices dropped to the 17,800 yen level and have thereafter been moving at the 18,000 yen level. Long-term interest rates have been moving in the range of the mid 1.8% to the high 1.9% level.