Monthly Economic Report (May 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". On April 25, seeking to boost productivity growth, the "Growth Potential Enhancing Program" was approved by the Council on Economic and Fiscal Policy.
  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

  Real GDP (gross domestic product) in the first quarter of 2007 grew by 0.6% on a quarterly basis (at an annual rate of 2.4%), posting positive growth for the ninth consecutive quarter. Nominal GDP grew by 0.3%, posting positive growth for the second consecutive quarter.

1.Demand trends such as consumption and investment

Private consumption is showing a pick up.
  Private consumption is showing a pick up. Consumer confidence and income moved horizontally, and 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 March in comparison with the previous month, but showing a pick up on average.

  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 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 houses for sale has been generally flat, 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 based on national and local budgetary situations despite the fact that the contracted amount of public works for April exceeded that of 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 increased gradually as a whole, with exports of electrical equipment 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 machinery equipment 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 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 the recent horizontal movement 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 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 shows that firms' judgment on current business conditions is generally flat.

  The number of bankrupt companies has remained almost flat. The number of corporate failures was approximately 1,100 in April, 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 on an upward trend. Overtime hours worked in the manufacturing industry decreased.

  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 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 falling to the 17,200 yen (Nikkei Stock Average) level, stock prices rose to the 17,700 yen level and thereafter have been moving at the 17,300 yen level. The yen against the U.S. dollar moved in the direction of depreciation to the 121-yen level.