Monthly Economic Report (June 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

  To realize "a beautiful country", the Government will put together the "Basic Policies 2007(provisional title)" which aims at an enhance of growth potential by promoting an open economy, a construction of a system of administration and finance in the 21st century and a realization of a sustainable and secure society which we can hand over to the next generation with confidence.
  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 picking up.
  Private consumption is picking 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 April 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.

  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 and 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.

  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 public works orders 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 gradually as a whole, with exports of transportation equipment decreasing. Exports to the EU have been flat. 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 as a whole, with imports of machinery equipment decreasing. Imports from the U.S. have been flat. Imports from the EU have been flat overall, with imports of foodstuffs decreasing.

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


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. By type of industry, profits of the manufacturing industry increased by 7.2% and those of the non-manufacturing industry increased by 7.6%, reflecting decreased profits in such industries as electrical machinery and transportation machinery, and increased profits in such industries as chemicals and services.

  The BOJ tankan shows that firms' judgment on current business conditions is generally flat.

  The number of bankrupt companies has remained almost flat. Although, the number of corporate failures was 1,310 in May, which is a year-on-year increase of 20.9%, the aggregate amount of indebtedness decreased year-on-year by 48.2% to 368.5 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. Although the effective ratio of job offers to applicants has been on a downward trend, it rose in April. The number of employees has been increasing. Overtime hours worked in the manufacturing industry have been moving horizontally. While the proportion of business establishments that implemented employment adjustment such as "overtime restrictions" has been on a downward trend, there was a 2 percentage point rise during the January-March quarter in comparison with the previous quarter.

  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 recently due to increased material prices. Consumer prices have been flat.
  Domestic corporate goods prices have been rising recently.

  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 from the 17,700 yen (Nikkei Stock Average) level to the 18,000 yen level, stock prices are moving at the 17,700 yen level. Long-term interest rates rose from the high 1.6% level to the high 1.9% level.